W01 Solution

# W01 Solution - W01 Solution 11(8 marks Jundel Inc plans...

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W01 Solution 1 1. (8 marks) Jundel Inc. plans \$400,000 in capital outlays for next year. The firm has a .25 D/E ratio, and uses a residual dividend policy. Earnings per share for the upcoming period are expected to be \$3.50. There are 200,000 shares. What is the firm’s expected dividend per share for the upcoming year? Step 1 - Calculate the amount of new equity (i.e., retained earnings) needed for next year. Total Capital = D + RE = \$400,000 D = .25 RE Therefore, .25RE + RE = \$400,000 RE = \$400,000/1.25 = \$320,000 Step 2 - Calculate the amount of the total dividend Total Dividend = Total Earnings - Total Retained Earnings Total Dividend = (200,000*\$3.40) - \$320,000 = \$360,000 Step 3 - Calculate the Dividend per share Dividend per share = Total Dividend / Number of shares = \$360,000 / 200,000 = \$1.80 per share 2. (12 marks) Jaltech Corp. needs to raise \$4,000,000 for a new plant in Jamaica. The firm currently has five million shares outstanding and the share price is \$12.60 per share. The firm is thinking of doing a rights offering. The subscription price will be \$8 per share. Each shareholder will get one right for each existing share. a) (3 marks) How many rights will be needed to purchase one new share? Number of new shares = \$4M/\$8 = 500,000 Number of rights/share = (# of old shares )/(# of new shares) = 5M/500,000 = 10 b) (3 marks) What will be the ex-rights price of the shares? Price = (Equity Value)/(# of shares) = ((5M*\$12.60) + \$4M)/(5M+500,000) = \$12.18 c) (3 marks) There are mailing costs associated with the rights offering. First, the firm has to mail all shareholders an information circular with a sign-up form, and then, if the shareholder sends back a completed sign-up form with the necessary funds, the firm has to send each shareholder a letter confirming the purchase of the new shares. The average number of shares held by each shareholder is 100 shares. Each mailing costs the firm \$1.50 and it is expected that 90% of the shareholders will

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W01 Solution - W01 Solution 11(8 marks Jundel Inc plans...

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