FINE 2000 Chapter Notes - Chapter 4: Deferred Tax, Market Capitalization, Net Income

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amethystmuskrat63

6 Nov 2014

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4. 1 measuring market value and market value added. Market capitalization: total market value of equity (share price x # of shares outstanding) Book value of equity: sum of the funds invested by shareholders when they purchase shares plus earnings reinvested by the company on behalf of shareholders. Market value added: market capitalization (share price x #shares outstanding) minus book value of equity. Market to book ratio: shows how much value has been added for each dollar that shareholders have invested = (market value of equity / book value of equity: ex. 2. 86 means the value of the stock is 2. 86 times the amount shareholders invested. Market capitalization = x 14. 5 million shares outstanding = 1,087,500,000. Market value added = 1,087,500,000 - ,000,000 = 477,500,000. Market to book ratio = 1,087,500,000/,000,000 = 1. 78. 4. 2 economic value added and accounting rates of return.

Related Questions

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $0.95 out of annual earnings per share of $3.5. Currently, Rubenstein Bros.' stock is selling for $20.00 per share. Adhering to the company's target capital structure, the firm has $15 million in total invested capital, of which 25% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 15%, which is expected to continue this year and into the foreseeable future.

Based on this information, what long-run growth rate can the firm be expected to maintain? Round your answer to two decimal places. Do not round intermediate calculations. (Hint: g = Retention rate x ROE.)
%

What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations.
%

If the firm changed its dividend policy and paid an annual dividend of $1.90 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Round your answer to two decimal places. Do not round intermediate calculations.
%

If this plan is implemented, what must the firm's required return be? Round your answer to two decimal places. Do not round intermediate calculations.
%

Suppose instead that the firm has decided to proceed with its original plan of disbursing $0.95 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $20.00. In other words, for every $20.00 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations.
%

If the plan in part d is implemented, how many new shares of stock will be issued? Round your answer to the nearest whole dollar. Do not round intermediate calculations.

If the plan in part d is implemented, by how much will the company's earnings per share be diluted? Round your answer to the nearest cent. Do not round intermediate calculations.
$ per share

plumminnow404

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $1.2 out of annual earnings per share of $3.75. Currently, Rubenstein Bros.' stock is selling for $16.00 per share. Adhering to the company's target capital structure, the firm has $11 million in total invested capital, of which 50% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 19%, which is expected to continue this year and into the foreseeable future.

What is the stock's required return? Round your answer to two decimal places. Do not round intermediate calculations.
%

If the firm changed its dividend policy and paid an annual dividend of $2.40 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must the firm's new expected long-run growth rate? Round your answer to two decimal places. Do not round intermediate calculations.
%

If this plan is implemented, what must the firm's required return be? Round your answer to two decimal places. Do not round intermediate calculations.
%

Suppose instead that the firm has decided to proceed with its original plan of disbursing $1.2 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of $16.00. In other words, for every $16.00 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember market capitalization = P0 x number of shares outstanding.) Round your answer to two decimal places. Do not round intermediate calculations.
%

plumspider975

I need the answers to the mini case on Chapter 9. The textbook solutions doesnt have anything posted yet. I need questions C-1,D-3,E 1-2, F,G,H,L, and O.

Textbook: Corporate Finance by Michael Ehrhardt and Eugene Brigham

Mini Case â Chapter 9,

During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis â s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task:(1) The firm â s tax rate is 40%.(2) The current price of Harry Davis â s 12% coupon, semiannual payment, non callable bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.(3) The current price of the firm â s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95. Harry Davis would incur flotation costs equal to 5% of the proceeds on a new issue.(4) Harry Davis â s common stock is currently selling at $50 per share. Its last dividend(D 0 ) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Davis â s beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%. For the own-bond-yield-plus- judgmental-risk-premium approach, the firm uses a 3.2% risk premium.(5) Harry Davis â s target capital structure is 30% long-term debt, 10% preferred stock ,and 60% common equity. To help you structure the task, Leigh Jones has asked you to answer the following questions.

Question 3 5 pts

Part C) What is the cost of preferred stock?

Question 4 5 pts

Part D) Using CAPM, what is the cost of equity?

Question 5 5 pts

Part E) Using DCF, what is the cost of equity?

Question 6 5 pts

Part E) If you had used ROE to calculate the growth rate in place of the given growth rate, what would the ROE-based growth rate be? (Note: ROE (return on equity) is the amount of profits earned per year on the shareholders' equity. If no dividends were paid out and the company was earning an ROE of 10%, then the entire 10% would be reinvested in the company each year. Consequently, we would expect the equity to grow at 10% per year. If, however, we paid out 70% of our earnings to our shareholders, we would only have 30% of those profits left to grow with. Consequently, we would expect the equity to grow by 3% per year (10% ROE x 30% retained.)

Question 7 5 pts

Part F) Using the bond premium method, what is the cost of equity?

Question 8 5 pts

Part G) What is your best estimate of cost of equity?

Just use an unweighted average of the three different cost of equity numbers you have computed.

Question 9 5 pts

Part H) What is the WACC?

Question 10 5 pts

Part L) What is the division cost of equity?

Question 11 5 pts

Part L) What should be the Division WACC? (Note: The book states that the Cost of Debt is 12%. This is confusing because the book usually uses the term "Cost of Debt" as the After-Tax Cost of Debt. It this problem, the book is using 12% as the Interest Rate or Pre-Tax Cost of Debt. The WACC calculation uses the After-Tax Cost of Debt.)

*Make certain that you are using the after-tax cost of debt based on 12% interest rate.

Question 12 5 pts

Part O) What is the estimated cost of equity?

Question 13 5 pts

Part O) Assuming that the bond sells for 100, what is the cost of debt?

*Recognize that "the bond sells at 100" means that the bond sells at 100% of face value. Also, make sure that you are inputting the cost of debt and not the interest rate.

chocolatemink901

FINE 2000 Chapter Notes - Chapter 4: Deferred Tax, Market Capitalization, Net Income

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