2002E	2003E	2004E	2005E	Terminal Value
EBIAT	50	50	60	60
CAPX	10	10	10	10
Depreciation	5	5	5	5
Investment in Working Capital	5	5	5	5
interest	5	5	5	5
goodwill	1	1	1	1

Risk free rate: 4%

Market risk premium: 7%

Expected growth rate of cash flows after 4. year = 5%

Beta Asset = 1.6

Beta Debt=1

Cost of Debt=8%

The company is planning to change the capital structure by the end of its 2^rd year. For the first two years debt to equity ratio is 2/3 and 1/4 afterwards. Assume the cost of debt is decreased to 6% with the change in the debt of the company. Calculate the value of the company using WACC approach. Assume corporate tax rate is 40%.

A company was distributing 5$ of dividends per share until this year. The board decided to decrease the dividend per share to 3.5$ for the current quarter only. This information is leaked to the public on the 23rd of April but the official announcement is made on April 25th. Assume the tax on dividend is the same as the tax on capital gains and investors believe that the decrease in dividends is a good action taken by the company as it is a bad time in the economy and has nothing to do with earnings.

a-) (9 points) What happens to the share price, increase, decrease or remain similar) under the following theories of dividend on announcement day? Assume ex-date is June 15th. What happened to share price on ex-date. How much the price will decrease or increase?

	23-Apr	25-Apr	15-June
Modigliani and Miller Irrelevance
Signaling
Agency
Clientele Effect ( Assuming majority of investors dislike dividend)

-)(7 points) Under Modigliani and Miller world, as the CEO of company, when you decided to distribute 1 Billion dollar cash, one of your shareholders, Mr. A, who purchased the stock on the ex-date, raised a concern that he will not be getting any dividend and he will be adversely affected by the distribution of the cash.

On the other hand, another shareholder, Mr. B, who was holding the stock before the ex-date argued that the earnings per share decreased and he is worse off because of the dividend payment.

What would be your answer to these shareholders? Do you agree or not agree with them? If you agree, justify your answer. If you dont agree, again justify your answer.

A company decided to pay dividend on June 1992. They pay 1$ every quarter. According to Modigliani and Miller Theorem, what happens to the stock price on June 1996 when they pay the 1 dollar they promised (i.e. on the ex-date)?