Principles of Finance I week 6 Assignment1

Principles of Finance I week 6 Assignment

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Principles of Finance I week 6 Assignment

14-3.

A stock dividend occurs when a company decides to retain any money so they can reinvest for purposes of growth in the business whereas a stock spilt occurs when the stock of the company is higher than the usual price range of their stock. According to L Altfest , (2016) a company usually use split to regulate the prices of the stock to the preferred range.

14-4.

The money usually gotten from the residual policy, is usually placed back into the business and reinvested for purposes of growth. (Ram Brooks, S Titman, 2011)The money that remains after reinvesting into the company is used in dividends. The table below shows different companies and their dividend payout ratios

14-5.

This statement is true. A company that decides to resell its stock are able to capital gain taxes.

• .

It is a true statement. After a 2-for-1 split, a person owning 100 shares will earn 200.

• .

The statement is true. There will be an increase in the amount of equity that can be available to the company.

• .

The statement is false. The tax code usually encourages the companies to use the loan and pay the shareholders or investors the interest they get and not in form of dividends because they are not taxed (SF LeRoy, J Werner, 2014). The tax code also emphasize investors to invest in a company that usually reinvest their earning compared to those that pay very high costs of dividends.

• .

The statement is true. When a company’s clientele opt for large dividends, the company can get used to a residual dividend policy, which means that there will be a very low or zero dividends for a duration of time which will not be good for the company.

• .

The statement is false. When a firm follows a residual dividend policy, holding all else constant, the firm’s investment potential will be higher because the dividend payout will be rejected (DN Hyman, 2014).

• .

15-1.

Break even quantity = Fixed costs

Unit contribution margin

Fixed costs= $500,000

Unit cost margin = ( $75 – $50)

= $25

Break event quantity = ($500,000)/($25)

= 20,000

15-2.

Unlevered beta= (1.15/(1+((1-tax rate)) * (debt / equity)))

Equity = (100%-20%)

=80%

Therefore,

unlevered beta= 1.15/(1+((1-40%)) * (20% / 80%)))

= 1.15/1+((1-0.4)) * (0.2/0.8)))

=1.15/(1+(0.6) * (0.25))

=1.15/(1+0.15)

=1.15/1.15

Therefore, unlevered beta=1

15-3.

Return without debt=5.5% + 1.0(6%)

=5.5% + 6%

=11.5%

Return with debt= 5.5% + 1.6(6%)

=5.5% + 9.6%

=15.1%

Thus the additional premium =(return with debt – return without debt)

=(15.1% -11.5%)

=3.6%

15-4.

Spost = Voperationnew(1-Wd)

=$500,000,000 * (1- 40%)

=$500,000,000 * ( 1 – 0.4)

=$500,000,000 * 0.6

=$300,000,000

15-5.

Ppost = Vopnew – Dold

Nprior

= 900,000,000 – 300,000,000

30,000,000

=$600,000,000

$30,000,000

Stock price after recap=20/share

Reference

SF LeRoy, J Werner, (2014), Principles of financial economics

DN Hyman, (2014), Public Finance,A contemporary application of theory to policy

Ram Brooks, S Titman, (2011), Financial Management

L Altfest , (2016), Personal Financial planning