HW_3_Solutions_Chapters_16_17[1]

# HW_3_Solutions_Chapters_16_17[1] - HW 3 Solutions Solutions...

This preview shows pages 1–3. Sign up to view the full content.

HW 3 Solutions Chapter 16, 17 Solutions to Chapter 16 Debt Policy Use the following information for questions 1-5: Suppose # of units sold (Q) = 100,000 Price per unit (P) = \$10 Variable cost (V) = \$4 Fixed operating costs =250,000 Fixed financing cost = 100,000 Tax rate is 35%. 1. DOL 2. DFL 3. DTL 4. If unit sales increase by 3% than net income increases by 3x2.4=7.2 5. For every 1% change in operating income, net income changes 1.4% due to financial leverage. 6. Breakeven 7. Value without debt= 25,000/.10=\$250,000 PV of tax shield = (100,000*.35*.08)/0.08=35,000 Value with debt = \$250,000+35,000=285,000

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Solutions for Chapter 17 1. Net Income Before Tax: \$500 Net Income After Tax: 500*(1-.35)= \$325 Dividend: \$325 Shareholder Tax: 325*.25=\$81.25 Net Dividend: 325-81.25=\$243.75 Implicit Tax Rate=(243.75-500)/500=51.25% 2. New EPS = 3. The market value of equity is 10/.10=\$100 million. Debt must be \$25 million (.25/.75)*100=25. The buyback increases debt to \$35 million and decreases equity to \$65 million. The new debt/equity ratio is 35/65. 4. a. May 7: Declaration date June 6: Last with-dividend date June 7: Ex-dividend date June 11: Record date July 2: Payment date b. The stock price will fall on the ex-dividend date, June 7. The price falls on this day because, as the stock goes ex-dividend, the shareholders are no longer entitled to receive the dividend. c. The annual dividend is: \$0.075 4 = \$0.30 The dividend yield is: \$0.30/\$27 = 0.0111 = 1.11% 5. a. The stock price will fall to: \$80 4/5 = \$64 b. The stock price will fall by a factor of 1.25 to: \$80/1.25 = \$64 c. First let us just look at how the share price is affected assuming no externalities such as signal the stock is a good buy and buying pushes stock prices up. Price after buyback with cash = (80*1,000,000-100,000*80) / 900,000 = \$80.
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/06/2011 for the course FIN 351 taught by Professor Li during the Spring '09 term at S.F. State.

### Page1 / 4

HW_3_Solutions_Chapters_16_17[1] - HW 3 Solutions Solutions...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online