Assume Genron has $20 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years. Its stock sells for $42 per share at present. Genrons board is meeting to decide how to pay out its $20 million in excess cash to shareholders. The board is considering two options: Use the $20 million to pay a $2 per share cash dividend for each of Genrons 10 million outstanding shares or repurchase shares instead of paying a dividend. They vote in favour of paying a $2 per share cash dividend now and $4.8 per share in subsequent years. Since a cash dividend is declared, the stock price will fall after the ex-dividend date. You have 2000 shares in Genron, but do not like the $2 per share dividend. You would rather have a constant earning of $4.50 per share. Show how you can accomplish this in a perfect world. Will your answer differ very significantly if you acted before or after the ex-dividend date?

In the real world, why will a firm not seek to take unlimited advantage of the interest tax shield? Explain your reasoning. b) A firm shares the following information with you: EBIT = $25 million; Tax rate = 35%; Debt = $75 million; Cost of debt = 9%; Unlevered cost of capital = 12% The firms creditors indicate that if the firms debt reaches 50% of its total capital value, they would increase interest rate on future financing to 10%. Realizing an increase in the firms borrowing cost; shareholders will also revise their required return to 13%. i) What is the current % of debt used by the firm? ii) Compute the current WACC. How will it change once the percentage debt reaches 50%? Should the firm borrow to increase its debt proportion in its capital structure? (4 marks) c) Critically discuss the tenets and limitations of Purchasing Power Parity theory

Assume Genron has $20 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years. Its stock sells for $42 per share at present. Genrons board is meeting to decide how to pay out its $20 million in excess cash to shareholders. The board is considering two options: Use the $20 million to pay a $2 per share cash dividend for each of Genrons 10 million outstanding shares or repurchase shares instead of paying a dividend. They vote in favour of paying a $2 per share cash dividend now and $4.8 per share in subsequent years. Since a cash dividend is declared, the stock price will fall after the ex-dividend date. You have 2000 shares in Genron, but do not like the $2 per share dividend. You would rather have a constant earning of $4.50 per share. Show how you can accomplish this in a perfect world. Will your answer differ very significantly if you acted before or after the ex-dividend date? b) What is a protective put? How can it be used to arrive at the Put-Call Parity condition?

Assume Genron has $20 million in excess cash and no debt. The firm expects to generate additional free cash flows of $48 million per year in subsequent years. Its stock sells for $42 per share at present. Genrons board is meeting to decide how to pay out its $20 million in excess cash to shareholders. The board is considering two options: Use the $20 million to pay a $2 per share cash dividend for each of Genrons 10 million outstanding shares or repurchase shares instead of paying a dividend. They vote in favour of paying a $2 per share cash dividend now and $4.8 per share in subsequent years. Since a cash dividend is declared, the stock price will fall after the ex-dividend date. You have 2000 shares in Genron, but do not like the $2 per share dividend. You would rather have a constant earning of $4.50 per share. Show how you can accomplish this in a perfect world. Will your answer differ very significantly if you acted before or after the ex-dividend date? b) What is a protective put? How can it be used to arrive at the Put-Call Parity condition?

Verbal Communications, Inc., has 14,000 shares of stock outstanding with a par value of $1 per share and a market value of $32 per share. The firm just announced a 100 percent stock dividend. What is the market value per share after the dividend?

Obama Inc and Osama Inc are competitors with very similar assets and business risks. Both are all equity firms with aftertax cash flows of $12 per year forever. Both have an overall cost of capital of 8%. Obama Inc is thinking of buying Osama Inc . The aftertax cash flow from the merged firm would be $25 per year. Does the merger create synergy? What is value of the Obama Inc. after the merger ? What is V? What is the total value of Osama Inc. to Obama Inc?

John Jet has a market value equal to its book value. Currently, the firm has excess cash of $1,200, other assets of $5,800, and equity valued at $3,750. The firm has 250 shares of stock outstanding and net income of $420. What will the new earnings per share be if the firm uses 25 percent of its excess cash to complete a stock repurchase?

ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $480,000 in stock. XYZ also uses the same dollar amount of capital with $240,000 in equity and the interest rate on its debt is 9 percent. Both firms expect EBIT to be $58,400. Ignore taxes. Compute the cost of equity for both firms.

Salsa Inc. estimates that the coming years earnings will be $75 million. There are 12 million shares outstanding and the target capital structure is 1.5:1. If the planned capital outlay is for $72 million, will Salsa Inc. be in a position to pay dividends as per the Residual Dividend Policy? If so, what will be the dividend per share?