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River Cruises is all-equity-financed

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River Cruises is all-equity-financed. /> Current DataNumber of shares:                       100,000Price per share:                      $            10Market value of shares:          $ 1,000,000 State of the Economy Slump      Normal           BoomProfits before interest:            $82,750       140,500        202,000
Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data. (Do not round intermediate calculations. Round “Earnings per share” to 3 decimal places. Enter “Return on shares” as a percent rounded to 2 decimal places.)
                                      OutcomesNumber of shares                                     Price per share                                          Market value of shares                              Market value of debt                                                                           State of the Economy                                              Slump                 Normal              BoomProfits before interest            82,750                 140,500              202,000     Interest                                                                                                              Equity earnings                                                                                                  Earnings per share                                                                                            Return on shares                              %                          %                        %                                            Expected Outcome                                                 

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Plank’s Plants had net income of $4,000 on sales of $90,000 last year

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1.  Plank’s Plants had net income of $4,000 on sales of $90,000 last year.

The firm paid a dividend of $400. Total assets were $300,000, of which $180,000 was financed by debt.

a. What is the firm’s sustainable growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

b. If the firm grows at its sustainable growth rate, how much debt will be issued next year? (Do not round intermediate calculations.)

c. What would be the maximum possible growth rate if the firm did not issue any debt next year? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

2. An all-equity-financed firm plans to grow at an annual rate of at least 19%. Its return on equity is 31%. What is the maximum possible dividend payout rate the firm can maintain without resorting to additional equity issues? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

 
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The 2017 financial statements for Growth Industries

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1.      The 2017 financial statements for Growth Industries are presented

below.

                                 INCOME STATEMENT, 2017

Sales                                                                          $250,000   

Costs                                                                           175,000   

EBIT                                                                            $75,000    

Interest expense                                                       15,000    

Taxable income                                                          $60,000  

Taxes (at 35%)                                                            21,000   

Net income                                                                  $39,000 

Dividends                                               $23,400                                                

Addition to retained earnings                15,600   

                        BALANCE SHEET, YEAR-END, 2017       

Assets                                                                                                                         Liabilities                                          

Current assets                                                                 Current liabilities                                         

Cash                                    $8,000                                 Accounts payable                        $15,000                

Accounts receivable            13,000                               Total current liabilities               $15,000                

Inventories                           29,000                                Long-term debt                           150,000                

Total current assets           $50,000                               Stockholders’ equity                               

Net plant and equipment 190,000               Common stock plus additional paid-in capital    15,000               

                                                                                   Retained earnings                   60,000               

Total assets                      $240,000        Total liabilities and stockholders’ equity    $240,000

Sales and costs are projected to grow at 40% a year for at least the next 4 years. Both current assets and accounts payable are projected to rise in proportion to sales. The firm is currently operating at 70% capacity, so it plans to increase fixed assets in proportion to sales. Interest expense will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of 0.60.

What is the required external financing over the next year? (Enter excess cash as a negative number with a minus sign.)

 
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Suppose that you own 2,600 shares of Nocash Corp.

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Q 1. Suppose that you own 2,600 shares of Nocash Corp. and the company is about

to pay a 25% stock dividend. The stock currently sells at $120 per share.

a. What will be the number of shares that you hold after the stock dividend is paid? (Do not round intermediate calculations.)

b. What will be the total value of your equity position after the stock dividend is paid? (Do not round intermediate calculations.)

c. What will be the number of shares that you hold if the firm splits five-for-four instead of paying the stock dividend?

Q 2. Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 1.5 million shares that are outstanding. Shareholders require a rate of return of 10% from Consolidated stock.

a. What is the price of Consolidated stock? (Do not round intermediate calculations.)

b. What is the total market value of its equity? (Enter your answer in millions.)

Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.

c. How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.)

d. What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.)

e. What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.)

f. Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive?

Q 3. The expected pretax return on three stocks is divided between dividends and capital gains in the follow way:

Expected Expected

Stock Dividend Capital Gain

A $0 $10

B 5 5

C 10 0

a. If each stock is priced at $115, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (the effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Stock Pension Investor Individual

corporation

A % % %

B % % %

C % % %

b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock Price

A

B

C

 
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