solutions manual

Instructions NAME:

To complete the homework assignments in the templates provided: 1. The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases. 2. You will enter the required information into the shaded cells. 3. The cells are coded: a. T requires a text answer. b. C requires a calculation. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary. c. F requires a number only. In some problems, a “Step 1” is added to help you solve the problem. 4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit by midnight EST, Day 7.

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 12-5 House of Haddock has 5,000 shares outstanding and the stock price is $140. The company is expected to pay a dividend of $20 per share next year and thereafter, the dividend is expected to grow indefinitely by 5% a year. The president, George Mullet, now makes a surprise announcement: He says that the company will henceforth distribute half the cash in the form of dividends and the remainder will be used to repurchase stock. a. What is the total value of the company before and after the announcement? What is the value of one share? b. What is the expected stream of dividends per share for an investor who plans to retain his shares rather than sell them back to the company? Check your estimate of share value by discounting this stream of dividends per share.

Answer:

a.

Total value before Total value after One share

b.

Discount rate = r Year 1 Repurchase at r Shares repurchased Dividend payout $10/share price

$ $ $

Calculation 700,000 595,000 119

Formula 140=20/(r-.05)

Calculation 0.192857143 $167 299 $140.00

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 12-6 Here are key financial data for House of Herring, Inc.: Earnings per share for 2015 Number of shares outstanding

$5.50 million 40 million

Target payout ratio

50%

Planned dividend per share

$2.75

Stock price, y/e 2015

$130

House of Herring plans to pay the entire dividend early in January 2016. All corporate and personal taxes were repealed in 2014. a. Other things equal, what will be House of Herring’s stock price after the planned dividend payout? b. Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase? c. Suppose the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.

Answers: a. b. c.

Stock price Stock price Shares repurchased Ex-dividend price Shares needed

Calculation $127.25 $130.00 846154 50%*$5.50*40mill = $110 mill $124.50 883534 $40mill*$2.75=$110 mill

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 13-3 The common stock and debt of Northern Sludge are valued at $50 million and $30 million, respectively. Investors currently require a 16% return on the common stock and an 8% return on the debt. If Northern Sludge issues an additional $10 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes.

Answer: Step 1: Equity Debt Re Rd Step 2: Expected return on assets (rA) New return on equity (rE)

60000000 20000000 16% 8% Calculation 0.13 0.147

Principles of Corporate Finance, Concise, 2nd Edition

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Problem 13-6

Look back to Section 13–1 (p. 329). Suppose that Ms. Macbeth’s investment bankers have informed her that since the new issue of debt is risky, debt holders will demand a return of 12.5%, which is 2.5% above the riskfree interest rate. a. What are rA and rE? b. Suppose that the beta of the unlevered stock was .6. What will A, E, and D be after the change to the capital structure?

Answers: Step 1: Operating income Market value of shares Expected return on debt Number of Shares Price per share Market value of shares- new debt Market value of debt

a. rA rD

2,000 5,000 12.5 500 10 5000

Formula rA=expected operating income/market value of all securities

Calculation

C

T

C

βA βE βD

F C C

TIP: see formulas on p. 331

Calculation b.

TIP: calculate E/V and D/V first

Principles of Corporate Finance, Concise, 2nd Edition