EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 15, Problem 10P
a.
Summary Introduction
To determined: Finance the expansion with externally raised equity.
b.
Summary Introduction
To determined: Finance the expansion with 50% externally and 50% internally generated equity. This will necessiate a dividend cut for this year.
c.
Summary Introduction
To determined: The various financing alternatives with reference to their effects on the dividend policy and common stock values of the company.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Johnson Inc. wishes to expand its facilities. The company currently has 6 million shares outstanding and no debt. The stock sells for $50 per share, but the book value per share is $20. Net income for Johnson is currently $12 million. The new facility will cost $20 million, and it will increase net income by $800,000. Johnson raises stock at the current price to finance the facility. Assume a constant price–earnings ratio. Does stock price dilution occur?
(A) stock price dilution occurs.
(B) stock price dilution does not occur.
The Emco Steel Company has experienced a slow (3 percent per year) but steady increase in earnings per share. The firm has consistently paid out an average of 75 percent of each year’s earnings as dividends. The stock market evaluates Emco primarily on the basis of its dividend payout because growth prospects are modest. Emco’s management presents a proposal to the board of directors that would require the outlay of $50 million to build a new plant in the rapidly expanding Florida market. The expected annual return on the investment in this plant is estimated to be in excess of 30 percent, more than twice the current company average. To finance this investment, a number of alternatives are being considered. They include the following:a. Finance the expansion with externally raised equity.b. Finance the expansion with 50 percent externally generated equity and 50 percent internally generated equity. This alternative would necessitate a dividend cut for this year only.c. Finance the…
Rome Corporation invests in the research and development department and will not pay dividends for the next several years. Venetian Industries is interested in acquiring shares of Rome Corporation. Venetian's CEO has estimated Rome's available cash flows for the next 3 years: $7 million, $9 million, and $12 million. After the third year, available cash flow is expected to grow by 5% on a steady basis. Rome Corporation's weighted average cost of capital (WACC) is 7%, the market value of its debt and preferred stock totals $60 million. Rome Corporation has $22 million of non-operating assets and 9 million shares of common stock outstanding.
Calculate the present value of expected available cash flows for the next 3 years.
Determine the market value of Rome Corporation's operations.
Calculate an estimate of the price per share of Rome Corporation.
Chapter 15 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 15 - Prob. 1QTDCh. 15 - Prob. 2QTDCh. 15 - Prob. 3QTDCh. 15 - Prob. 4QTDCh. 15 - Prob. 5QTDCh. 15 - Prob. 6QTDCh. 15 - Prob. 7QTDCh. 15 - Prob. 8QTDCh. 15 - Prob. 9QTDCh. 15 - Prob. 10QTD
Ch. 15 - Prob. 11QTDCh. 15 - Prob. 12QTDCh. 15 - Prob. 13QTDCh. 15 - Prob. 14QTDCh. 15 - Prob. 15QTDCh. 15 - Prob. 16QTDCh. 15 - Prob. 17QTDCh. 15 - Prob. 18QTDCh. 15 - Prob. 1PCh. 15 - Prob. 2PCh. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - Prob. 5PCh. 15 - Prob. 6PCh. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 12PCh. 15 - Prob. 13PCh. 15 - Prob. 14PCh. 15 - Prob. 15P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Tangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent. Determine the value per share for Tangshan Mining under both the current and proposed capital structure ?arrow_forwardTangshan Mining Company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a dividend next year of $4.89 per share and dividends are grow at a constant rate of 5 percent for the foreseeable future. Stockholders currently require a 10.89 percent return on their investment. Tangshan Mining is considering changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected dividend to $5.24 per share. Because of the additional leverage, dividend growth is expected to increase to 6 percent and this growth will be sustained indefinitely. However, because of the added risk, the required return demanded by stockholders will increase to 11.34 percent. Determine the value per share for Tangshan Mining under both the current and proposed capital structure ? A. $74.01 and $79.02 B. $67.03 and $65.51 C. $82.03 and $98.12 D.…arrow_forwardHarte Textiles, Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclic downturn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a target payout ratio of 30%. Management is preparing a share repurchase recommendation to present to the firm's board of directors. The following data have been gathered from the last two years: LOADING... 2021 2022 Earnings available for common stockholders $1,995,000 $1,900,000 Number of shares outstanding 356,250 356,250 Earnings per share $5.60 $5.33 Market price per share $29.12 $24.52 Price/earnings ratio 5.2 4.6 a) How many shares should the company have outstanding in 2022 if its earnings available for common stockholders in that year are $1,900,000 and it pays a dividend of $2.00, given that its desired payout ratio is…arrow_forward
- Texs. Inc. is facing a new investment opportunity that has a similar business risk as its current operation. The project will require $12 million initial investment and is expected to generate volatile cash flow during the first three years. The estimated after tax cash flow during year 1 through 3 is given below. From year 4 the after tax cash flow is expected to grow at a constant growth rate of 2% per year. The company's current balance sheet shows a $2 billion debt in book value and the debt is trading at 80% of book value. The debt beta is 0.6 the market value of equity of the company is 4.8 billion and the equity beta is 1.75. The company has kept a stable capital structure in the past. To take this new investment project, the company will issue $10 million new debt at the current borrowing cost. The under written charges of 1.5% of the debt issue as their total commission. The company plans to gradually reduce borrowing in the first 3 years and then return to its previous stable…arrow_forwardThe company plans to efficiently maintain the assets in the long run. The average total assets of the firm are $45,000. The firm also plans to cover the solvency ratios in a reasonable manner to seek additional refinancing from the capital providers. The company has 50,000 shares outstanding. The company plans to raise more capital by issuing shares. The company’s ROE has been determined to be 10% which is likely to go up in the next year. The company is concerned about the profitability ratios of the company and it is seeking your advice to improve them. The sales of the recent quarter of 2019 have gone down to $5,800 whereas the net earnings are $ 3,200. The company is planning to expand in the future. It is planning to open one more branch in Greater Vancouver region. The shareholders, Board of Directors (BOD) and the managers may have disagreement on its decision though. 4. What is the Asset turnover for the company? 5. Calculate the TIE ratio and also respond whether it is…arrow_forwardGarret Simpson Investments is evaluating a firm (Garp, Inc.) for recommendation to its clients and trying to evaluate the firm's current stock price. The firm is about to offer its shares to the public and had earnings last year of $2.50 a share, which the analysts believe is expected to grow by 20% next year. Similar firms in the industry are currently selling for price-earnings ratios ranging from ten to fifteen times current period earnings. However, these competitor firms are already public entities and have relatively low growth expectations for their earnings. What is your estimate of an appropriate price range for the shares of Garp? Defend your answer.arrow_forward
- Western Electric Utility Company faces increasing needs for capital. Fortunately, it has an A (low) credit rating. The corporate tax rate is 30 percent. Western’s treasurer is trying to determine the corporation’s current weighted average cost of capital to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased at about a 6.0 percent annual rate. Western Electric’s common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D1). The company’s $100 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment dealer to be $1.50 for preferred stock. The company’s optimum capital structure is 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risks to Western…arrow_forwardXYZ Corporation is considering an expansion project that will produce $90,000 worth of annual operating cash flows for the next four years. During the life of this project, the firm’s CFO expects inventory to increase by $35,000 and also expects accounts receivable to decrease by $10,000. The CFO believes that accounts payable will increase by $20,000. At the end of the project (year 4), the CFO assumes that net working capital will return to its normal level. The project requires the purchase of machinery at an initial cost of $70,000. Machinery installation costs are $10,000. This machine will be depreciated straight-line to a zero book value over the life of the project, but can be salvaged at the end of the project (year 4) creating a $30,000 before-tax cash flow. The company also owns land that will be used for the purpose of this expansion project. Luckily, the company bought this land pre-COVID, 3 years ago for only $25,000. At the time of purchase, the company paid $6,000 to…arrow_forwardWestern Electric Utility Company faces increasing needs for capital. Fortunately, it has an A (low) credit rating. The corporate tax rate is 30 percent. Western’s treasurer is trying to determine the corporation’s current weighted average cost of capital to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased at about a 6.0 percent annual rate. Western Electric’s common stock is selling at $60 per share, and the company will pay a $4.50 per share dividend (D1). The company’s $100 preferred stock has been yielding 9 percent in the current market. Flotation costs for the company have been estimated by its investment dealer to be $1.50 for preferred stock. The company’s optimum capital structure is 40 percent debt, 10 percent preferred stock, and 50 percent common equity in the form of retained earnings. Refer to the table below on bond issues for comparative yields on bonds of equal risks to Western…arrow_forward
- A stock market analyst has forecasted the following year-end numbers for Raedebe Technology. Sales = $70 million. EBITDA = $20 million. Depreciation = $ 7 million. Amortization = $ 0.The company’s tax rate is 40 percent. The company does not expect any changes in its net operating working capital. This year the company’s planned gross capital expenditures will total $12 million. (Gross capital expenditures represent capital expenditures before deducting depreciation.) What is the company’s forecasted free cash flow for the year?arrow_forwardBanerjee Inc. wants to maintain a capital structure with 30 percent debt and 70 percent common equity. Its forecasted net income is $ 535,000, and its board of directors has decreed that no new stock to be issued during the coming year. If the firms follows the residual dividend policy, what is the maximum capital budget that is consistent with maintaining its capital structure ?arrow_forwardKendra Brown is analyzing the capital requirements for Reynolds Corporation for next year. Kendra forecasts that Reynolds will need $15 million to fund all of its positive-NPV projects, and her job is to determine how to raise the money. Reynolds’s net income is $11 million , and it has paid a $2.00 dividend per share (DPS) for the past several years (1 million shares of common stock are outstanding); its shareholders expect the dividend to remain constant for the next several years. The company’s target capital structure is 30% debt and 70% equity. a. Suppose Reynolds follows the residual model and makes all distributions as dividends. How much retained earnings will it need to fund its capital budget? b. If Reynolds follows the residual model with all distributions in the form of dividends, what will be its dividend per share and payout ratio for the upcoming year? g. Now consider the case in which Reynolds’s management wants to maintain the $2.00 DPS and its target capital structure…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY