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shares

/in /by

Question

Mr. and Mrs. Anderson own three shares of Magic Tricks Corporation’s common stock. The market value of the stock

is $72. The Andersons also have $60 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $60 for each three shares currently owned (based on three rights). (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

a. What is the value of a right?

Value per right

b. What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)

Portfolio value

c-1. Compute the diluted value (ex-rights) per share.

Diluted value

c-2. If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?

Portfolio value

d. If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?

Portfolio value

 
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shares

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Question

Enterprise Storage Company has 460,000 shares of cumulative preferred stock outstanding, which has a stated

dividend of $5.50. It is six years in arrears in its dividend payments. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a. How much in total dollars is the company behind in its payments? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

Dividend in arrears

b. The firm proposes to offer new common stock to the preferred stockholders to wipe out the deficit.

The common stock will pay the following dividends over the next four years:

 D1 $1.25  

 D2 1.35  

 D3 1.45  

 D4 1.55  

The company anticipates earnings per share after four years will be $4.11 with a P/E ratio of 12.

The common stock will be valued as the present value of future dividends plus the present value of the future stock price after four years. The discount rate used by the investment banker is 12 percent.

Compute the value of the common stock. (Do not round intermediate calculations and round your answer to 2 decimal places.)

Common stock

c. How many shares of common stock must be issued at the value computed in part b to eliminate the deficit (arrearage) computed in part a? (Do not round intermediate calculations and round your answer to the nearest whole share.)

Number of shares of common stock

 
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stockholders’ equity

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Question

Planetary Travel Co. has $210,000,000 in stockholders’ equity. Common stock is $40,000,000 and the balance is

retained earnings. The firm has $295,000,000 in total assets and 4 percent of this value is in cash. Earnings for the year are $21,000,000 and are included in retained earnings.

a. What is the legal limit on current dividends? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

Legal limit on current dividends

b. What is the practical limit based on liquidity? (Do not round intermediate calculations. Input your answer in dollars, not millions (e.g., $1,234,000).)

Practical limit on current dividends

c. If the company pays out the amount in part b, what is the dividend payout ratio? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 
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future dividend policy

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Question

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its

life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 10 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 31 percent and eventually reach 52 percent during the maturity stage (IV).

a. Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage. (Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations and round your answers to 2 decimal places.)

Stage I $ .30

Stage II 2.10

Stage III 2.70

Stage IV 3.60

Dividends

Stage I

Stage II

Stage III

Stage IV

b. Assume in Stage IV that an investor owns 330 shares and is in a 15 percent tax bracket. What will be the investor’s aftertax income from the cash dividend? (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. In what two stages is the firm most likely to utilize stock dividends or stock splits? (Select two answers. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer.)

Stage I

Stage II

Stage III

Stage IV

 
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