quiz4b.ch12ch13ch14ch15 - University of Houston Bauer...

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University of Houston Bauer College of Business Finance 3332 Principles of Financial Management Quiz 4b: Spring, 2006 Please show all work and clearly indicate your answer. (9 points each) Use the following information for questions 1 and 2. Alford Corporation, whose stock is selling for $25 per share, has the following stockholder equity account. Common Stock ($3.00 par, 50,000 shares) $ 150,000 Additional Paid in Capital 800,000 Retained Earnings 900,000 Total Stockholders Equity $1,850,000 1. The firm declared a 6 for 1 stock split. Show the effect of the stock split on the stockholders equity account. Common Stock ($___ par, ____________ shares) $ __________ Additional Paid in Capital __________ Retained Earnings __________ Total Stockholders Equity $ __________ 2. i) The firm declared a 6 percent stock dividend. Show the effect of the stock dividend on the stockholders equity account. Common Stock ($___ par, ____________ shares) $ __________ Additional Paid in Capital __________ Retained Earnings __________ Total Stockholders Equity $ __________ ii) What effect will the stock dividend have on stockholder wealth? iii) What is the expected price per share after the stock dividend?
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Use the following information for questions 3 and 4. Ross Industries is planning an expansion costing $500,000. It can finance with new equity sold to net $20 per share, or with the sale of bonds with an 8% coupon. The firm’s marginal tax rate is 40%. Ross currently has the following simplified balance sheet. Liabilities and Capital Bonds (6% coupon) $2,000,000 Common Stock at $2 par 250,000 shares outstanding 500,000 Additional Paid in Capital 800,000 Retained Earnings 1,100,000 Total Liabilities and Capital $4,400,000 3. What is the EBIT-EPS indifference point of the two financing plans?
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