Chapter 17 - Dropbox 4.4

Problem 3: Share Repurchase

In the previous problem (#2), suppose Ferguson has announced it is instead going to repurchase $15,600 of stock.

a) What effect will this have on the equity of the firm?  How much will equity change?                                                                                               b) How many shares will remain outstanding after the purchase?                                                                                                                        c) What will the price be per share after the repurchase?                                                                                                d) Show how the repurchase is effectively the same as a cash dividend.

a) What effect will this have on the equity of the firm?  How much will equity change?                                                                                               b) How many shares will remain outstanding after the purchase?                                                                                                                        c) What will the price be per share after the repurchase?                                                                                                d) Show how the repurchase is effectively the same as a cash dividend.

Chapter 16 - Dropbox 4.4

Problem 2: Break-Even EBIT and Leverage

Haskell Corp. is comparing three different capital structures.  Plan 1 would result in 13,000 shares of stock and $130,500 in debt.  Plan 2 would result in 10,400 shares of stock and $243,600 in debt.  Plan 3 is an all-equity (no debt) plan and would result in 16,000 shares of stock outstanding.  The interest rate on the debt is 10 percent.  EBIT will be $56,000 in all scenarios.

a) Ignoring taxes, compare the three plans.  Which of the three plans would result in the highest Earnings per Share (EPS)?  Which results in the lowest EPS?                                                                                                  b) In part (a), what are the break-even levels of EBIT for each plan?  Is one higher than the other?  Why or why not?                                                                                                                                                                    c) Ignoring taxes, when will EPS be identical for Plans 1 and 2?                                                                                                        d) Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40 percent.  Are the break-even levels of EBIT different than before?  Why or why not?

Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.

Chapter 16 - Dropbox 4.4

Problem 3: Calculating Weighted Average Cost of Capital (WACC)

Twice Shy Industries has a debt-equity ratio of 1.5.  Its WACC is 8.4 percent, and its cost of debt is 5.9 percent.  The corporate tax rate is 35 percent.

a) What is the company's cost of equity capital?                                                                             b) What is the company's unlevered cost of equity capital?                                                             c) What would the cost of equity be if the debt-equity ratio were 2?  What if it were 1?  What if it were zero?

Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.

Chapter 17 - Dropbox 4.4

Problem 1: Stock Splits and Stock Dividends

Simmons Mineral Operations, Inc., (SMO) currently has 490,000 shares of stock outstanding that sell for $73 per share.  Assuming no market imperfections or tax effects exist, calculate both the share price and number of outstanding shares after:

a) SMO has a five-for-three stock split?                                                                                     b) SMO has a 15 percent stock dividend?                                                                                           c) SMO has a 42.5 percent stock dividend?                                                                                   d) SMO has a four-for-seven reverse stock split?

Create your Original Solution Below - Be sure to show all calculations and clearly indicate answers.

Chapter 17 - Dropbox 4.4

Problem 2: Regular Dividends

The balance sheet for Ferguson Corp. is shown below in market-value terms.  There are 12,000 shares of stock outstanding.

Market Value Balance Sheet

Cash

$52,900

Liabilities

$0

Fixed Assets

$335,000

Equity

$387,900

Total

$387,900

Total

$387,900

The company has declared a dividend of $1.30 per share.  The stock goes ex-dividend tomorrow.  Tax effects should be ignored.

a) What is the stock selling for today?                                                                                               b) What will the stock sell for tomorrow?                                                                                                                        c) What will the balance sheet look like after the dividends are paid?

Use the Template Provided Below to Create Your Solution - Pay close attention to the formulas and formatting of the inputs.

Chapter 17 - Dropbox 4.4

Problem 3: Share Repurchase

In the previous problem (#2), suppose Ferguson has announced it is instead going to repurchase $15,600 of stock.

a) What effect will this have on the equity of the firm?  How much will equity change?                                                                                               b) How many shares will remain outstanding after the purchase?                                                                                                                        c) What will the price be per share after the repurchase?                                                                                                d) Show how the repurchase is effectively the same as a cash dividend.

a) What effect will this have on the equity of the firm?  How much will equity change?                                                                                               b) How many shares will remain outstanding after the purchase?                                                                                                                        c) What will the price be per share after the repurchase?                                                                                                d) d) d) d)Show how the repurchase is effectively the same as a cash dividend.