ABC Corp. has 2 million shares outstanding and no debt. Each year it generates (on average)...
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ABC Corp. has 2 million shares outstanding and no debt. Each year it generates (on average) a cash-flow of $9.6m which is paid out to shareholders as a regular dividend. ABC pays no taxes and its cost of capital is 12%. (Since ABC has no debt, this is also its expected return on equity). a. What is ABC's stock price? b. ABC's CEO plans to borrow $8m and use the proceeds immediately to pay shareholders an exceptional dividend. This level of debt will be riskfree. The riskfree rate is 5%. Answer the following; assuming the transaction (borrowing + exceptional dividend) has already occurred. c. What is ABC's new stock price? Compare to its initial stock price. Explain. d. Are ABC's shareholders happy about the CEO's change in policy? e. What is ABC's annual interest expense? What is the new average regular annual dividend per share? What is ABC's new expected return on equity? Compare to its initial 12% return. Explain. ABC Corp. has 2 million shares outstanding and no debt. Each year it generates (on average) a cash-flow of $9.6m which is paid out to shareholders as a regular dividend. ABC pays no taxes and its cost of capital is 12%. (Since ABC has no debt, this is also its expected return on equity). a. What is ABC's stock price? b. ABC's CEO plans to borrow $8m and use the proceeds immediately to pay shareholders an exceptional dividend. This level of debt will be riskfree. The riskfree rate is 5%. Answer the following; assuming the transaction (borrowing + exceptional dividend) has already occurred. c. What is ABC's new stock price? Compare to its initial stock price. Explain. d. Are ABC's shareholders happy about the CEO's change in policy? e. What is ABC's annual interest expense? What is the new average regular annual dividend per share? What is ABC's new expected return on equity? Compare to its initial 12% return. Explain.
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Answer rating: 100% (QA)
a To calculate ABC Corps stock price we can use the dividend discount model DDM DDM values a stock based on the present value of its future dividends ... View the full answer
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