BCO222 BUSINESS FINANCE II WEEK 4: FINANCIAL LEVERAGE, CAPITAL STRUCTURE AND DIVIDEND POLICY INDIVIDUAL PRACTICE QUESTION 1: The stock of a company will go ex-dividend tomorrow. The cash dividend will be $2.00 per share, and there are 4,000,000 shares of stock outstanding. The market-value balance sheet is the following: Assets Cash Other assets Total $ 16,000,000 84,000,000 100,000,000 Liabilities and Equity Equity $80,000,000 Liabilities 20,000,000 Total 100,000,000 Instructions: a) Ignoring any tax effects, what price are the shares selling for today? What price will they sell tomorrow? What effect will the cash dividend payment have on the balance sheet? b) Suppose that instead of cash dividend, the company has announced that it is going to repurchase $8,000,000 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the repurchase? QUESTION 2: A company is comparing two different capital structures: Plan I would result in 14,000 shares of stock and 180,000 in debt. Plan II would result in 12,000 shares of stock and C260,000 in debt. The interest rate on the debt is 10 percent. Instructions: a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be 150,000 The all-equity plan would result in 16,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest? All Equity Plan Piani Plan 11 EBIT Interest EBT Taxes Net Income No of shares outstanding Earnings Per Share (b) Repeat part (a) assuming that the corporate tax rate is 22 percent. Which of the three plans has the highest EPS? The lowest? All Equity Plan Plan 1 Plan 11 EBIT Interest EBT Taxes Net Income No of shares outstanding Earnings Per Share