HW_3_Solutions_Chapters_16_17[1]

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

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

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