A-4 Appendix Answers to Select Basic Problems
bre44380_app_A1-A10 4 10/09/15 08:14 PM
should expand to satisfy this clientele, and if the supply
of dividends already meets demand, then no single firm
can increase its market value simply by paying divi-
dends. Without significant tax differentials, firm value
is unaffected by the choice between dividends and
repurchases.- First, the CFO must confirm the amount of surplus
cash. Is free cash flow reliably positive? Is the debt
ratio prudent? Is there a sufficient cushion of cash or
unused debt capacity? If the answers are yes, payout
can commence. Payout of a regular cash dividend is a
commitment that is hard to reverse.
CHAPTER 17
1.CHAPTER 15
- a. Further sale of an already publicly traded stock;
b. U.S. bond issue by foreign corporation;
c. Bond issue by industrial company;
d. Bond issue by large industrial company. - a. Financing of start-up companies.
b. Underwriters gather nonbinding indications of
demand for a new issue.
c. The difference between the price at which the
underwriter buys the security from the company and
resells it to investors.
d. Description of a security offering filed with the SEC.
e. Winning bidders for a new issue tend to overpay. - (a) False; (b) False; (c) True.
- a. Number of new shares, 50,000;
b. Amount of new investment, $500,000;
c. Total value of company after issue, $4,500,000;
d. Total number of shares after issue, 150,000;
e. Stock price after issue, $4,500,000/150,000 = $30;
f. The opportunity to buy one share is worth $20.
CHAPTER 16
- a. declaration date; last with-dividend date; ex-dividend
date; record date; payment date
b. On August 12, the ex-dividend date;
c. (.83 × 4)/$71 = .0468, or 4.68%;
d. (.83 × 4)/$5.90 = .5627, or 56.27%;
e. The price would fall to 71/1.10 = $64.55. - a. Announcement of a dividend increase signals man-
agers’ confidence in future profits, and thus the stock
price rises with the announcement.
b. On the ex-dividend date the price will fall by approx-
imately the dividend amount ($1). - a. There will still be 1 million shares and the
stock price will fall to $10. Shareholders’
wealth, including the cash dividend, will equal
$10 + 2 = $12 per share.
b. It will spend $2 million to repurchase 166,667 shares
at $12 each, leaving 833,333 shares outstanding.
Stock price remains at $12 ($10 million divided by
833,333 shares). - Mr. Milquetoast will have to sell a fraction of his invest-
ment each year to raise $5,000. - No, demand from investors that prefer a dividend-
paying stock does not necessarily lift the prices of these
stocks relative to stocks of companies that pay no divi-
dends but repurchase shares. The supply of dividends
Market Value
Common stock (8 million shares at $2) $16,000,000
Short-term loans $ 2,000,000Ms. Kraft owns .625% of the firm, which will increase
common stock to $17 million and cut short-term debt.
Ms. Kraft can offset this by (a) borrowing $6,250, and
(b) buying that much more Copperhead stock.- Expected return on assets is rA = .13. The new return on
equity will be rE = .147. - a. True;
b. True (as long as the return earned by the company
is greater than the interest payment, earnings
per share increase, but the P/E falls to reflect the
higher risk);
c. False (the cost of equity increases with the ratio D/E);
d. False (the formula rE = rA + (D/E)(rA − rD) does not
require rD to be constant);
e. False (debt amplifies variations in equity income);
f. False (value increases only if clientele is not satisfied). - See Figure 17.3.
CHAPTER 18- The calculation assumes that the tax rate is fixed,
that debt is fixed and perpetual, and that investors’
personal tax rates on interest and equity income are
the same. - Relative advantage of debt =
1 − Tp
______________
(1 − TpE)(1 − Tc)= _______.65
(1)(.65)= 1.00Relative advantage = ________.65
(.85)(.65)= 1.18