Calculate overall and per share market value of beta company

Assignment Help Financial Management

Reference no: EM131316997

On January 1, 2009, you examine two unlevered firms that operate in the same industry, have identical assets worth $80 million that yield a net profit of 12.5 percent per year, and have 10 million shares outstanding.

During 2009, and all subsequent years, each firm has the opportunity to invest an amount equal to its net income in (slightly) positive-NPV investment projects. The Beta Company wants to finance its capital spending through retained earnings. The Gamma Company wants to pay out 100 percent of its annual earnings as cash dividends and to finance its investments with a new share offering each year. There are no taxes or transactions costs to issuing securities.

a. Calculate the overall and per-share market value of the Beta Company at the end of 2009 and each of the two following years (2010 and 2011). What return on investment will this firm's shareholders earn?

b. Describe the specific steps that the Gamma Company must take today (1/1/2009), and at the end of each of the next three years (year-end 2009, 2010, and 2011), if it pays out all of its net income as dividends and still grows its assets at the same rate as that of the Beta Company.

c. Calculate the number and per-share price of shares that the Gamma Company must sell today, and at the end of 2009, 2010, and 2011, if it pays out all of its net income as dividends and still grows its assets at the same rate as that of the Beta Company.

d. Assuming that you currently own 100,000 shares (1 percent) of Gamma Company stock, compute the fraction of the company's total outstanding equity that you will own three years from now if you do not participate in any of the share offerings the firm will make during this holding period.

Reference no: EM131316997

Questions Cloud

Calculate the companys dividend payout ratio : Calculate the company's dividend payout ratio;- the nominal dividend per share, assuming Well-Bred pays dividends annually;

Show decision is irrelevant in world of frictionless market : The firm has an opportunity to invest in a (minimally) positive-NPV project that will cost $25 million over the course of 2009.- Show that the decision is irrelevant in a world of frictionless markets.

What happens to the dividend irrelevance result : Show that the decision is irrelevant in a world of frictionless markets. What happens to the dividend-irrelevance result if a personal income tax of 15 percent is introduced into the model?

What is the reported level of significance : Write an appropriate null hypothesis for this analysis - what is the mean number of days it takes for symptoms to cease for each brand and what is the standard deviation of the number of days it takes for symptoms to cease for each brand?

Calculate overall and per share market value of beta company : Calculate the overall and per-share market value of the Beta Company at the end of 2009 and each of the two following years (2010 and 2011).

What is super thrifts current dividend per share : What is Super-Thrift's current dividend per share? What is it expected to be next year?- Use the Gordon growth model (see Equation) to calculate SuperThrift's stock price today.

Numerical problems in network analysis : Give examples of numerical problems in network analysis with solutions and justification where Superposition theorem may be more useful than mesh/nodal analysis - The use of Thevenin's/Norton's equivalent circuit may be more useful than mesh/nodal an..

How would you establish the existence of an outbreak : Answer the following questions about your investigation: How would you establish the existence of an outbreak? What are steps or measures you will take to verify the diagnosis

Use gordon growth model to calculate cccs stock price today : What is CCC's current dividend per share? What is it expected to be next year?- Use the Gordon growth model (see Equation) to calculate CCC's stock price today.

User Account

All Pages