ch9solns - Chapter 9 9-1 a. There are a number of ways in...

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Unformatted text preview: Chapter 9 9-1 a. There are a number of ways in which BMD can increase its debt ratio 1. It can borrow $1.15 billion and buy back stock. 2. It can borrow $1.15 billion and pay special dividends. 3. It can borrow more than $1.15 billion and take projects over time, in which case its optimal dollar debt will be higher. For instance, if the money is borrowed now to take projects, the debt needed can be estimated approximately: X/(2,300+X) = 0.5, Solving for X, X = 2,300. b. From the viewpoint of the effect on equity, there is no difference between repurchasing stock and paying a special dividend. There may be a tax difference to the recipient, since dividends and capital gains are taxed differently. c. If BMD has a cash balance of $250 million, it can use this cash to buy back stock. BMD, therefore, needs to borrow only $1.025 billion to get to 50%. 9-2 a. Current 1 2 3 4 5 Debt $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 Equity $900.00 $1,003.95 $1,119.72 $1,248.68 $1,392.35 $1,552.42 D/(D+E) 10.00% 9.06% 8.20% 7.41% 6.70% 6.05% D/E 11.11% 9.96% 8.93% 8.01% 7.18% 6.44% Net Income $67.50 $74.25 $81.68 $89.84 $98.83 $108.71 Dividends $13.50 $14.85 $16.34 $17.97 $19.77 $21.74 Beta 1.10 1.09 1.09 1.08 1.08 1.07 Expected Return 13.05% 13.01% 12.98% 12.94% 12.92% 12.89% Dividend Yield 1.50% 1.48% 1.46% 1.44% 1.42% 1.40% Exp. Price Appreciation 11.55% 11.53% 11.52% 11.51% 11.50% 11.49% b. Current 1 2 3 4 5 Debt $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 Equity $ 900.00 $ 940.93 $ 978.71 $ 1,012.06 $ 1,039.43 $ 1,059.00 D/(D+E) 10.00% 9.61% 9.27% 8.99% 8.78% 8.63% D/E 11.11% 10.63% 10.22% 9.88% 9.62% 9.44% Net Income $ 67.50 $ 74.25 $ 81.68 $ 89.84 $ 98.83 $ 108.71 Dividends $ 27.00 $ 29.70 $ 32.67 $ 35.94 $ 39.53 $ 43.48 Stock Buybacks $ 49.52 $ 55.16 $ 61.41 $ 68.34 $ 76.02 Beta 1.10 1.10 1.09 1.09 1.09 1.09 Expected Return 13.05% 13.03% 13.02% 13.01% 13.00% 12.99% Dividend Yield 3.00% 3.16% 3.34% 3.55% 3.80% 4.11% Exp. Price Appr. 10.05% 9.88% 9.68% 9.46% 9.20% 8.89% To estimate the stock bought back in year 1, estimate first the value of the equity at the end of year 1, which will be $ 900 (1.1005). Then take 5% of that number, since the buyback occurs at the end of the year. 9-3 The solution to this problem is similar to that of problem 2, except that dividends are constant in this case. a) If the existing policy of paying $ 50 million in dividends is continued. Current 1 2 3 4 5 Debt $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 $ 5,000.00 Equity $ 500.00 $ 518.00 $ 537.43 $ 558.40 $ 581.04 $ 605.48 D/(D+E) 90.91% 90.61% 90.29% 89.95% 89.59% 89.20% D/E 1000.00% 965.25% 930.35% 895.41% 860.52% 825.79% Dividends $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50.00 $ 50....
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This note was uploaded on 10/06/2011 for the course FIN 413 taught by Professor Irfansafdar during the Summer '11 term at Rochester.

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ch9solns - Chapter 9 9-1 a. There are a number of ways in...

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