Find the new stock price after the ex-dividend date

Assignment Help Financial Management

Reference no: EM131078215

An unlevered firm has a market value of $10 million, with $1 million of its assets in cash. With 500,000 shares outstanding, its current stock price is $20.

a) Under the assumptions of Modigliani-Miller, what is the effect on the stock price of an announcement of a $1 special dividend to be paid in 6 months?

b) Find the new stock price after the ex-dividend date.

c) Assume that firm decides to repurchase $500,000 worth of stock instead. Under the assumptions of Modigliani-Miller, what happens to the share price after the repurchase takes place?

d) Assume now that the personal tax rate exceeds the capital gains tax rate. Will investors prefer the dividend or share repurchase? What happens to the stock price at announcement if the firm decides to pay a special dividend?

Reference no: EM131078215

Questions Cloud

Lease the equipment or buy the equipment : The Barnstormer Corp. needs new equipment that would cost $3.5 million and would fall into the MACRS 5-year class for depreciation purposes. Maintenance would be included in the lease payment. Barnstormer is in the 30% marginal tax bracket. Should Ba..

Considering two projects for inclusion in its capital budget : Quantitative Problem: Bellinger Industries is considering two projects for inclusion in its capital budget, and you have been asked to do the analysis. Both projects' after-tax cash flows are shown on the time line below. Depreciation, salvage values..

Leading competitor customers are satisfied : A business determines that 75% of its customers are satisfied. This business also learns that 80% of a leading competitor's customers are satisfied. If this business implements a program to reach 80% customer satisfaction, this is called ________.

Considering first round of venture capital investment : TacoCorp is considering a first round of venture capital investment. Taco is the majority shareholder with 1000 shares. Jenny and Kevin each have 250 shares in TacoCorp. Taco’s initial investment is $10000. The VC firm is valuing TacoCorp at $70000. ..

Find the new stock price after the ex-dividend date : An unlevered firm has a market value of $10 million, with $1 million of its assets in cash. With 500,000 shares outstanding, its current stock price is $20. Under the assumptions of Modigliani-Miller, what is the effect on the stock price of an annou..

Company is costco wholesale corps-calculate return on equity : The Final Paper will involve applying the concepts learned in class to an analysis of a company using data from its annual report. Calculate Return on Equity (ROE) using the DuPont system. Evaluate the soundness of the company’s financial policies (e..

Calculate the par value of the eight-year bond : An insurance company owns a 1,000 par value 10% bond with semiannual coupons. The bond will mature for 1,000 at the end of 10 years. The company decides that an 8-year bond would be preferable. Current yield rates are 7% compounded semiannually. The ..

Why does the coupon rate affect the volatility of bond price : You are the fund Manager and you have decided to invest in a Bond with a 10 percent coupon and a 4- year maturity currently priced at par with interest paid annually. Your interest rate outlook is that rates will continue to fall and so you need to k..

User Account

All Pages