Lesson #8, Assignment #4 - expand its existing...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Read the minicase 'Electronic Timing, Inc.' on pages 577-578 of your text; address the questions below in a brief essay of 300-400 words. 1. Tom believes that the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company? The one time dividend will not affect the stock price. The value of the company will decline by the amount of the dividend. Ignoring taxes, shareholders wealth will not be affected because the stock price will drop by the amount of the dividend payment. 2. Jessica believes the company should use the extra cash to pay off debt and to upgrade and
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: expand its existing manufacturing capability. How would Jessica's proposal affect the company? The value of the company could increase or decrease. If the company is over-levered, paying off debt can lower the interest rate on debt, and decrease financial distress costs. If there are no financial distress costs, capital structure theory argues that increasing debt can increase the value of the company because of the interest tax shield. 3. Nolan favors a share repurchase. He argues that a repurchase will increase the company's P/E ratio, return on assets, and return on equity. Are his arguments correct? Yes he is correct, but the increase is irrelevant....
View Full Document

This note was uploaded on 04/29/2011 for the course FINANCE BA521 taught by Professor Mark during the Spring '11 term at Antelope Valley College.

Ask a homework question - tutors are online