FIN 620 Session 10 Homework Assignment Answers

# FIN 620 Session 10 Homework Assignment Answers - FIN 620...

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FIN 620 Session 10 Homework Assignment Answers: Session 10: Do problems 19-4, 19-16, 19-20, 29-8, and 29-16 19-4. To find the new stock price, we multiply the current stock price by the ratio of old shares to new shares, so: a. \$78(3/5) = \$46.80 b. \$78(1/1.15) = \$67.83 c. \$78(1/1.425) = \$54.74 d. \$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 19-16. a. Using the formula from the text proposed by Lintner: Div 1 = Div 0 + s ( t EPS 1 – Div 0 ) Div 1 = \$1.50 + .3[(.4)(\$4.15) – \$1.50] Div 1 = \$1.548 b. Now we use an adjustment rate of 0.60, so the dividend next year will be: Div 1 = Div 0 + s ( t EPS 1 – Div 0 ) Div 1 = \$1.50 + .6[(.4)(\$4.15) – \$1.50] Div 1 = \$1.596 c. The lower adjustment factor in part a is more conservative. The lower adjustment factor will always result in a lower future dividend.

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19-20. a. Let x be the ordinary income tax rate. The individual receives an after-tax dividend of: Aftertax dividend = \$1,000(1 – x ) which she invests in Treasury bonds. The Treasury bond will generate aftertax cash flows to the investor of: Aftertax cash flow from Treasury bonds = \$1,000(1 – x )[1 + .08(1 – x )] If the firm invests the money, its proceeds are: Firm proceeds = \$1,000[1 + .08(1 – .35)] And the proceeds to the investor when the firm pays a dividend will be: Proceeds if firm invests first = (1 – x ){\$1,000[1 + .08(1 – .35)]} To be indifferent, the investor’s proceeds must be the same whether she invests the after-tax dividend or receives the proceeds from the firm’s investment and pays taxes on that amount. To find the rate at which the investor would be indifferent, we can set the two equations equal, and solve for x . Doing so, we find: \$1,000(1 –
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## This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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FIN 620 Session 10 Homework Assignment Answers - FIN 620...

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