FIN 3715 Chapter : Finance Test 3

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azuremammoth471

15 Mar 2019

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It expects earnings at the end of the year of. Valence pays out 40% of its earnings in total 15% paid out as dividends and 25% used to repurchase shares. It decides to retain 10% of these earnings in order to lease new aircraft. The return on this investment will be 25%. If its equity cost of capital is 11%, what is the expected share price of jumbo transport: . 71, . 83, . 94, . 18. Explanation: d) d1 = . 00 (1 - 0. 1) = . 8; g = 0. 1 0. 25 = 0. 025; P0 = . 8 / (0. 11 - 0. 025) = . 18: gremlin industries will pay a dividend of . 90 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. The current price of gremlin"s stock is . 50 per share. What is gremlin"s equity cost of capital: 11, 12, 14, 16%

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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

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FIN 3715 Chapter : Finance Test 3

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