This choice does, however, affect how individual shareholders’ accounts are reported in the balance sheet. Formally retiring shares restores the balances in both the common stock account and paid-in capital - excess of par to how those balances would have looked if the shares never had been issued. Any net increase in assets produced from the sale and ensuing repurchase is reflected as Paid-in capital—share repurchase. On the other hand, any net decrease in assets resulting from the sale and subsequent repurchase is repeated as a subtraction of retained earnings. Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity.
Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend. b. What net tax savings per share for an investor would result from this decision? c. What would happen to Arbuckle’s stock price upon the announcement of this change? Problem 17-19 on Dividend Capture Strategy based on Chapter 17 Payout Policy Que Corporation pays a regular dividend of $1 per share.
Other things equal they prefer to pay more for stocks that are more risky and have uncertain cash flows. • Investors are risk averse. Other things equal they prefer to pay more for stocks that are less risky and that have relatively certain cash flows than other stocks. When determining the value of a firm, which of the following statements is ture? • A financial asset is considered to have value if it has the ability to generate positive cash flows.
Both the 10%-coupon bond and the par bond have yields that are some average of the two zero rates. Since the 10%-coupon bond has a higher coupon than the par bond, its yield is more influenced by the 0.5-year zero rate, which is higher than the 1-year rate, so its yield should be higher. In fact, the yield on the 10%coupon bond is 5.8244%, which exceeds the 1-year par rate of 5.8233%. 1 2) The current price of $1 par of a zero maturing at time 2 is $0.90. In addition, you can contract today to purchase, at time 2, $1 par of a zero
In Keynesian analysis, a supply shock may reduce output in two ways: (1) a reduction in output, because the supply shock reduces the marginal product of labor, shifting the FE line to the left; and (2) a further reduction in output if the supply shock is something like an oil price shock that is large enough to cause many firms to raise prices, shifting the LM curve up and to the left so much that it intersects the IS curve to the left of the FE line. Supply shocks create problems for stabilization policy because: (1) policy can do nothing to affect the location of the FE line; and (2) using expansionary policy risks worsening the already-high rate of
The mean of the complete portfolio as a function of the proportion invested in the risky portfolio (y) is: E(rC) = (l - y)rf + yE(rP) = rf + y[E(rP) - rf] = 5.5 + y(12.88 - 5.5) Setting E(rC) = 12% ==> y = 0.8808 (88.08% in the risky portfolio) 1 - y = 0.1192 (11.92% in T-bills) From the composition of the optimal risky portfolio: Proportion of stocks in complete portfolio = 0.8808 × 0.6466 = 0.5695 Proportion of bonds in complete portfolio = 0.8808 × 0.3534 = 0.3113 12. 1. Using only the stock and bond funds to achieve a mean of 12% we solve: 12 = 15wS + 9(1 - wS) = 9 + 6wS Þ wS = 0.5 Investing 50% in stocks and 50% in bonds yields a mean of 12% and standard deviation of: sP = [(0.502 × 1024) + (0.502 × 529) + (2 × 0.50 × 0.50 × 110.4)] 1/2 =
True b. False 6(9-7) Free cash flows and valuation F G Answer: a EASY [vi]. Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations. a. True b.
| | | | | | | | TRUE | | | | | | | | | All the unique risk of stocks in a diversified portfolio have been diversified away | | | | | | | | | | | | | | | | | | | | | c. If a stock's expected rate of return plots below the security market line, it is underprices. | FALSE | | | | | | | | | It is overpriced. The expected return is less which means that return is over a higher price | | | | | | | | | | | d. A diversified portfolio with a beta of 2 is twice as volatile as the market portfolio. | | TRUE | | | | | | |
What is ABCs expected share price post exercise of warrants? What is the yield on ABCs bonds with warrants? Solution: The price of ABC’s straight bond at time of issuance is B= 1, 000 + $50 $50 $50 + ... + + 2 1 + 10% (1 + 10%) (1 + 10%)20 1 − (1 + 10%)−20 $1, 000 = $50 × + 10% (1 + 10%)20 = $574.32 The value of a warrant at time of issuance is W = $1, 000 − $574.32 = $21.28
.Which of the following statements is NOT correct? èThe corporate valuation model discounts free cash flows by the required return on equity. 2. Which of the following statements is correct?) If a project with normal cash flows has an IRR greater than the WACC, the project must also have a positive NPV.