Finance Calculations
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week_7_hh.docx|
Chapter 17, Question 1-Suppose that you own 1,700 shares of Nocash Corp. and the company is about to pay a 25% stock dividend. The stock currently sells at $120 per share. |
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What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.) |
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Number of shares |
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b. |
What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.) |
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Total value |
$ |
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c. |
What will be the number of shares that you hold if the firm splits five for four instead of paying the stock dividend? |
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Number of shares hold |
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Chapter 17, Question 2- Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.1 million shares that are outstanding. Shareholders require a 10% rate of return from Consolidated stock. |
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a. |
What is the price of Consolidated stock? |
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Stock price |
$ |
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b. |
What is the total market value of its equity? (Enter your answer in millions.) |
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Market value of equity |
$ million |
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Chapter 17, Question 3- Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. |
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c. |
How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) |
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New equity |
$ million |
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d. |
What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) |
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Present value |
$ million |
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e. |
What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.) |
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Transfer of value |
$ million |
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f. |
Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive? |
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The expected pretax return on three stocks is divided between dividends and capital gains in the following way: |
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Stock |
Expected Dividend |
Expected Capital Gain |
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A |
$ 0 |
$ 3 |
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B |
13 |
13 |
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C |
27 |
0 |
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a. |
If each stock is priced at $100, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) |
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Stock |
Pension |
Investor Corporation |
Individual |
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A |
% |
% |
% |
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B |
% |
% |
% |
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C |
% |
% |
% |
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b. |
Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.) |
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Stock |
Price |
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A |
$ |
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B |
$ |
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C |
$ |
