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

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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
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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....
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