Chapter 17 - Business Finance Questions

Q1.) Suppose that you own 1,200 shares of Nocash Corp. and the company is about to pay a 25% stock dividend. The stock currently sells at $115 per share.

a.What will be the number of shares that you hold after the stock dividend is paid?(Do not round intermediate calculations.)

Number of Shares_______________

b.What will be the total value of your equity position after the stock dividend is paid?(Do not round intermediate calculations.)

Total Value_______________

c.What will be the number of shares that you hold if the firm splits five-for-four instead of paying the stock dividend?

Number of Shares Hold__________________

Q2.) Consolidated Pasta is currently expected to pay annual dividends of $10 a share in perpetuity on the 2.5 million shares that are outstanding. Shareholders require a rate of return of 10% from Consolidated stock.

a.What is the price of Consolidated stock?

Stock Price_____________

b.What is the total market value of its equity?(Enter your answer in millions.)

Market Value of Equity________________Millions

Consolidated now decides to increase next year's dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year.

c.How much new equity capital will the company need to raise to finance the extra dividend payment?(Enter your answer in millions.)

New Equity_____________Million

d.What will be the total present value of dividends paid each year on the new shares that the company will need to issue?(Enter your answer in millions.)

Present Value___________Million

e.What will be the transfer of value from the old shareholders to the new shareholders?(Enter your answer in millions.)

Transfer of Value__________Million

Q3.) The expected pretax return on three stocks is divided between dividends and capital gains in the following way:

81:qu nzvuland Cnpztnl Gem A $0 54 B 10 ll] C 26 I] a. If each stock is priced at $100. what are the expected net percentage returns on each stock to ii} a pension fund that does not pay taxes. [ii] a corporation paying tax at 35% [the effective tax rate on dividends received by corporations is 10.5%}. and {iii} an individual with an effective tax rate of 15% on dividends and 10% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places} um\" ----- % n-II-- % ----- % b. Suppose that Investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 3%. what would A, B. and C each sell for? Assume the expected dividend is a level perpetuity. {Do not round intermediate calculations. Round your answers to 2 decimal places.)