Assume that the XYZ firm has the following parameters in a world with no taxes: ( =
Question:
( = .2................... instantaneous standard deviation,
T = 4 years ............ maturity of debt,
V = $2,000 ............ value of the firm (V = B + S),
Rf = .6 ................ Risk free rate,
D = $1,000 ........... face value of debt.
(a) What will be the market value of equity cum dividend (i.e., before any dividend is paid)?
(b) If the shareholders decide to pay themselves a $500 dividend out of cash, what will be the ex-dividend wealth of shareholders? (The dividend payment will have two effects. First, it will decrease the market value of the firm to $1,500. Second, since cash has little or no risk, the instantaneous standard deviation of the firm's assets will increase to .25.)
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Step by Step Answer:
a See the solution to Problem 1517 b Once again we use the OPM to determine the market v...View the full answer
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Related Book For 
Financial Theory and Corporate Policy
ISBN: 978-0321127211
4th edition
Authors: Thomas E. Copeland, J. Fred Weston, Kuldeep Shastri
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