FIN 300 Lecture Notes - Lecture 7: Dividend Discount Model, Dividend Yield, Dividend Tax

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14 Nov 2016

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The coupon rate is not the interest rate. As time goes by, interest rate may change in the market, but coupon rate does not change. There is an inverse relationship between bond price and interest rate. Governments and corporations borrow money for the long term by issuing and selling securities such as bonds. Corporations have alternatives; can issue and sell securities such as stocks or shares. Investors who purchase the stocks are called stockholders or equity holders or shareholders. Primary market: part of the financial markets where the sale of new stock first occurs. Seasoned equity issue (seo): sale of new shares by a firm that has already been through an. Initial public offering (ipo): first offering of stock to the general public. Secondary market: part of the financial markets in which already issued securities are traded by investors. Common stock: ownership shares in a publicly held corporation, without priority for dividends or in bankruptcy.

Related Questions

1. (TCO D) Which of the following statements is NOT CORRECT? (a) When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." (b) "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. (c) Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. (d) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. (e) It is possible for a firm to go public and yet not raise any additional new capital. 2. (TCO D) Europa Corporation is financing an ongoing construction project. The firm will need $5,000,000 of new capital during each of the next three years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40 percent debt and 60 percent equity, and it wants to be at that structure in three years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in three separate issues? (a) $79,425 (b) $83,606 (c) $88,006 (d) $92,406 (e) $97,027

Valuing Stocks

Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It is also considering issuing stock or bonds to raise funds in the next year. If Carson goes public, it might even consider using its stock as a means of acquiring some target firms. It would also consider engaging in a secondary offering at a future point in time if the IPO is successful and if its growth continues over time. It would also change its compensation system so that most of its managers would receive about 30 percent of their compensation in shares of Carson stock and the remainder as salary.

a. At the present time, the priceâearnings ratio (stock price per share divided by earnings per share) of other firms in Carsonâs industry is relatively low but should rise in the future. Why might this information affect the time at which Carson issues its stock?

b. Assume that Carson Company believes that issuing stock is an efficient means of circumventing the potential for high interest rates. Even if long-term interest rates have increased by the time it issues stock, Carson thinks that it would be insulated by issuing stock instead of bonds. Is this view correct?

c. Carson Company recognizes the importance of a high stock price at the time it engages in an IPO (if it goes public). But why would its stock price be important to Carson Company even after the IPO?

d. If Carson Company goes public, it may be able to motivate its managers by granting them stock as part of their compensation. Explain why the stock may motivate them to perform well. Then explain why the use of stock as compensation may motivate them to focus on short-term goals even though they are supposed to focus on maximizing shareholder wealth over the long run. How can a firm provide stock as motivation but prevent its managers from using a short-term focus?

lilacrabbit105

16. The covariance between Van Goughâs common stock returns and the return on the market portfolio is 0.008. The variance of the market 0.02. Which of the following comes closest to the beta of Van Goughâs common stock?

A. 0.6

B. 0.4

C. 0.1

D. 0.2

17. According to the M&M tax model, the value of a levered firm is equal to the value of an unlevered firm plus the tax shield from debt. What does this model imply about the firmâs optimal capital structure?

	A.	0 % debt
	B.	25% debt
	C.	100% debt
	D.	50% debt

18. Northern Wood Products is currently an all-equity firm with 16,000 shares of stock outstanding and a total market value of $352,000. Management is considering raising additional $88,000 either by issuing additional 1000 common stocks at $88 each, or by issuing 88 bonds with a 6 percent coupon rate and $1000 face value. If the firm is expected to have EBIT of $26,000,

what will the earnings per share be if they issue additional stock? Assume tax rate of 50%.

	A.	0.76
	B.	0.36
	C.	0.65
	D.	0.48

PLEASE ANSWER ALL QUESTIONS

FIN 300 Lecture Notes - Lecture 7: Dividend Discount Model, Dividend Yield, Dividend Tax

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