fin-8

Assignment 8

IMPORTANT…….READ THIS

NOTE: Your answers to the questions below should be in your own words. You

should not copy from another students’ work or from any other source without

including an in-text citation.

Style Guidelines: Use 12 pt. times new roman font. Your margins should be set at 1”. You

should double space your text. Use in-text citations and include a ‘References’ page after your

text answers. You should use 1 to 2 sources, in addition to the textbook, as references for each

question (See Assignment 8 folder for Additional Resources for this assignment in

Blackboard). Check your spelling and grammar carefully.

Grade Guidelines: Each discussion question is worth 20 points and will be graded based on style,

content, and clarity. The expected length of your submission is 1.5 to 2.5 pages per question.

1. Chapter 18: Discuss dividend policy.

2. Chapter 20: Discuss the advantages and disadvantages of mergers/acquisitions and the impact

to stakeholders.

3. Chapter 21: Discuss ways a corporation may expand into international markets and the related

risks.

SHOW YOUR CALCULATIONS FOR EVERY PROBLEM TO RECEIVE CREDIT

Chapter 18 Problem

4. (5 Points) Arbicom Systems earned $680 million last year and paid out 20 percent of earnings

in dividends.

a. By how much did the company’s retained earnings increase?

b. With 100 million shares outstanding and stock price of $80, what was the dividend

yield? (Hint: First compute dividends per share.)

Chapter 20 Problems

5. (7 Points) AtoZ Enterprises is considering a cash acquisition of Patterson Steel Company for

$40,000,000. Patterson will provide the following pattern of cash inflows and synergistic

benefits for the next 15 years. There is no tax loss carryforward.

Years

1–5 6–15

Cash inflow (aftertax) ........................ $5,440,000 $6,600,000

Synergistic benefits (aftertax) ............ 500,000 700,000

The cost of capital for the acquiring firm is 12 percent. Should the merger be undertaken?

(If you have difficulty with deferred time value of money problems, consult Chapter 9.)

6. (8 Points) The Allbright Corporation is considering acquiring the Lincoln Corporation. The

data for two companies are as follows:

Lincoln

Corp.

Allbright Corp.

Total earnings ................................................ $500,000 $2,000,000

Number of shares of stock outstanding ......... 200,000 1,000,000

Earnings per share ......................................... $2.50 $2.00

Price-earnings ratio (P/E) .............................. 16 20

Market price per share ................................... $40 $40

a. The Allbright Corp. is going to give Lincoln Corp. a 50 percent premium over Lincoln

Corp.’s current market value. What price will it pay?

b. At the price computed in part a, what is the total market value of Lincoln Corp.?

c. How many shares must Allbright Corp. issue to buy the Lincoln Corp. at the total value

computed in part b? (Keep in mind Allbright Corp.’s price per share is $40.)

d. Given the answer to part d, how many shares will Allbright Corp. have after the

merger?

e. Add together the total earnings of both corporations and divide by the total shares

computed in part e. What are the new postmerger earnings per share?

g. Why has Allbright Corp.’s earnings per share gone down?

h. How can Allbright Corp. hope to overcome this dilution?