Corporate_Finance_9th_edition_Solutions_Manual_FINAL0

47 since you own 1000 shares in one year you want

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Unformatted text preview: for capital gains, while Sarah exhibits a preference for current income. Cap could show the Sarah how to construct homemade dividends through the sale of stock. Of course, Cap will also have to convince her that she lives in an MM world. Remember that homemade dividends can only be constructed under the MM assumptions. Sarah may still not invest in Neotech because of the transaction costs involved in constructing homemade dividends. Also, Sarah may desire the uncertainty resolution which comes with high dividend stocks. 17. To minimize her tax burden, your aunt should divest herself of high dividend yield stocks and invest in low dividend yield stocks. Or, if possible, she should keep her high dividend stocks, borrow an equivalent amount of money and invest that money in a tax-deferred account. 395 18. The capital investment needs of small, growing companies are very high. Therefore, payment of dividends could curtail their investment opportunities. Their other option is to issue stock to pay the dividend, thereby incurring issuance costs. In either case, the companies and thus their investors are better off with a zero dividend policy during the firms’ rapid growth phases. This fact makes these firms attractive only to low dividend clienteles. This example demonstrates that dividend policy is relevant when there are issuance costs. Indeed, it may be relevant whenever the assumptions behind the MM model are not met. 19. Unless there is an unsatisfied high dividend clientele, a firm cannot improve its share price by switching policies. If the market is in equilibrium, the number of people who desire high dividend payout stocks should exactly equal the number of such stocks available. The supplies and demands of each clientele will be exactly met in equilibrium. If the market is not in equilibrium, the supply of high dividend payout stocks may be less than the demand. Only in such a situation could a firm benefit from a policy shift. 20. This finding implies that firms use initial dividends to “signal” their potential growth and positive NPV prospects to the stock market. The initiation of regular cash dividends also serves to convince the market that their high current earnings are not temporary. Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. The aftertax dividend is the pretax dividend times one minus the tax rate, so: Aftertax dividend = $5.60(1 – .15) = $4.76 The stock price should drop by the aftertax dividend amount, or: Ex-dividend price = $75 – 4.76 = $70.24 2. a. The shares outstanding increases by 10 percent, so: New shares outstanding = 20,000(1.10) = 22,000 New shares issued = 2,000 396 Since the par value of the new shares is $1, the capital surplus per share is $47. The total capital surplus is therefore: Capital surplus on new shares = 2,000($47) = $94,000 Common stock ($1 value) Capital surplus Retained earnings b. par $ 22,000 304,000 639,300 $965,300 The shares outstanding increases by 25 percent, so: New shares outstanding = 20,000(1.25) = 25,000 New shares issued = 5,000 Since the par value of the new shares is $1, the capital surplus per share is $47. The total capital surplus is therefore: Capital surplus on new shares = 5,000($47) = $235,000 Common stock ($1 value) Capital surplus Retained earnings par $ 25,000 445,000 495,300 $965,300 3. a. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: New shares outstanding = 20,000(4/1) = 80,000 The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is: New par value = $1(1/4) = $0.25 per share. b. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: New shares outstanding = 20,000(1/5) = 4,000. The equity accounts are unchanged except that the par value of the stock is changed by the ratio of new shares to old shares, so the new par value is: New par value = $1(5/1) = $5.00 per share. 397 4. To find the new stock price, we multiply the current stock price by the ratio of old shares to new shares, so: a. b. c. d. $78(3/5) = $46.80 $78(1/1.15) = $67.83 $78(1/1.425) = $54.74 $78(7/4) = $136.50. To find the new shares outstanding, we multiply the current shares outstanding times the ratio of new shares to old shares, so: a: 260,000(5/3) = 433,333 b: 260,000(1.15) = 299,000 c: 260,000(1.425) = 370,500 d: 260,000(4/7) = 148,571 5. The stock price is the total market value of equity divided by the shares outstanding, so: P0 = $380,000 equity/8,000 shares = $47.50 per share Ignoring...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of Texas-Tyler.

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