Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Exercise 1 {5 points). Modigliani-WE} ABC Corp. has 2 million shares outstanding and no deht. Each year it generates [on average) a cash-ow of $9.6m
Exercise 1 {5 points). Modigliani-WE} ABC Corp. has 2 million shares outstanding and no deht. Each year it generates [on average) a cash-ow of $9.6m which is paid out to shareholders as a regular dividend. ABC pays no taxes and its cost of capital is 12%. (Since ABC has no debt, this is also its expected return on equity). a. What is ABC's stock price? h. ABC's CED plans to borrow 33m and use the proceeds immediately to pay shareholders an exceptional dividend. This level of debt will he riskfree. The riskfrce rate is 5%. Answer the following; assuming the transaction (borrowing + exceptional dividend} has already occurred c. What is $303 new stock price? lCompare to its initial stock price. Explain. d. Are ABC's shareholders happy about the CE's change in policy? e. What is 303 annual interest expense? What is the new average regular annual dividend per share? What is ABC's new expected return on equity? Compare to its initial 12% return. Explain
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started