Reference no: EM13356144
Question 1- Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977?
Question 2-Why might management use a poison pill strategy?
Question 3-Dividends & Repurchases. Go to the Apple website or to a financial source like Yahoo! Finance.
a. Has Apple's dividend increased from the initial quarterly rate of $2.65?
b. What was the announcement date of the most recent dividend?
c. When did Apple stock last go ex-dividend?
d. What happened to the stock price on the ex-dividend date? When was the dividend actually paid?
e. What is Apple's dividend yield?
f. Look up estimates of Apple's EPS for the next year. What is the dividend payout ratio?
g. How much does Apple plan to spend on repurchases in the next year? What is the overall payout ratio (dividend plus repurchases)?
Question 4- MM proposition 1. Executive Cheese has issued debt with a market value of $100 million and has outstanding 15 million shares with a market price of $10 a share. IT now announces that it intends to issue a further $60 million of debt and to use the proceeds to buy back common stock. Debt holders, seeing the extra risk, mark the value of the existing debt down to $70 million.
a. How is the market price of the stock affected by the announcement?
b. How many shares can the company buy back with the $60 million of new debt that is issues?
c. What is the market value of the firm (equity plus debt) after the change in capital structure?
d. What is the debt ratio after the change in structure?
e. Who (if anyone) gains or lose?
Question 5- Trade-off theory. The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory predict about the relationship between book profitability and target book debt ratios? Is the theory's prediction consistent with the facts?
Question 6- Financial Slacks. For what kinds of companies is financial slack most valuable? Are there situations in which financial slack should be reduces by borrowing and paying out the proceeds to the stockholders? Explain.
Question 7- WACC. The WACC formula seems to imply the debt is "cheaper" than equity- that is, that a firm with more debt could use lower discount rate. Does this make sense? Descrive briefly.