Financial Accounting problems

Instructions

Instructions
NAME:
To complete the homework assignments in the templates provided:
1.The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases.
2.You will enter the required information into the shaded cells.
3.The cells are coded:
a) T requires a text answer. Essay questions require references; use the textbook.
b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
c) F requires a number only. In some problems, a “Step 1” is added to help you solve the problem.
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).
4.Name your assignment file as “lastnamefirstinitial-FINC600-Week#”, and submit by midnight ET, Day 7.

P12-6

Problem 12-6
Here are key financial data for House of Herring, Inc.:
Earnings per share for 2015$5.50
Number of shares outstanding40 million
Target payout ratio50%
Planned dividend per share$2.75
Stock price, y/e 2015$130
House of Herring plans to pay the entire dividend early in January 2016. All corporate and personal taxes were repealed in 2014. a. Other things equal, what will be House of Herring’s stock price after the planned dividend payout? b. Suppose the company cancels the dividend and announces that it will use the money saved to repurchase shares. What happens to the stock price on the announcement date? Assume that investors learn nothing about the company’s prospects from the announcement. How many shares will the company need to repurchase? c. Suppose the company increases dividends to $5.50 per share and then issues new shares to recoup the extra cash paid out as dividends. What happens to the ex-dividend share prices? How many shares will need to be issued? Again, assume investors learn nothing from the announcement about House of Herring’s prospects.
Answers:
Calculation
a.Stock price$127.25
b.Stock price$130.00
Shares repurchased846154
c.Ex-dividend price$124.50
Shares needed883534

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

Principles of Corporate Finance, Concise, 2nd Edition

P12-12

Problem 12-12
Respond to the following comment: “It’s all very well saying that I can sell shares to cover cash needs, but that may mean selling at the bottom of the market. If the company pays a regular cash dividend, investors avoid that risk.”
Answer:
T

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P13-11

Problem 13-11
Executive Chalk is financed solely by common stock and has outstanding 25 million shares with a market price of $10 a share. It now announces that it intends to issue $160 million of debt and to use the proceeds to buy back common stock. a. How is the market price of the stock affected by the announcement? b. How many shares can the company buy back with the $160 million of new debt that it 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 loses?
Answer:
a.The announcement will make the price go up.
b.C
c.
d.
e.The original share holders will gain as the possibility of the stocks going up.

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

P13-14

Problem 13-14
“MM totally ignore the fact that as you borrow more, you have to pay higher rates of interest.” Explain carefully whether this is a valid objection.
Answer:
Valid Objection – Yes or No?No
This is not a valid objection. MMs Proposition II explicitly allows for the rates of return for both debt and equity to increase as the proportion of debt in the capital structure increases. The rate for debt increases because the debt-holders are taking on more of the risk of the firm; the rate for common stock increases because of increasing financial leverage.

Instructions: Please refer to your book for assistance with your homework. Post your work in the worksheet. Highlight your final answer.

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