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Financial Planning Problems




Question;17-19. A stock;that you know is held by long-term individual investors paid a large one-time;dividend. You notice that the price drop on the ex-dividend date is about the;size of the dividend payment. You find this relationship puzzling given the tax;disadvantage of dividends. Explain how the dividend-capture theory might;account for this behavior.;17-20. Clovix;Corporation has $50 million in cash, 10 million shares outstanding, and a;current share price of $30. Clovix is deciding whether to use the $50 million;to pay an immediate special dividend of $5 per share, or to retain and invest;it at the risk-free rate of 10% and use the $5 million in interest earned to;increase its regular annual dividend of $0.50 per share. Assume perfect capital;markets.;a. Suppose Clovix pays the special dividend.;How can a shareholder who would prefer an increase in the regular dividend;create it on her own?;b. Suppose Clovix increases its regular;dividend. How can a shareholder who would prefer the special dividend create it;on her own?.;17-21. Assume;capital markets are perfect. Kay Industries currently has $100 million invested;in short;term Treasury securities paying 7%, and it;pays out the interest payments on these securities each year as a dividend. The;board is considering selling the Treasury securities and paying out the;proceeds as a one-time dividend payment.;a. If the board went ahead with this plan;what would happen to the value of Kay stock upon the announcement of a change;in policy?;b. What would happen to the value of Kay stock;on the ex-dividend date of the one-time dividend?;c. Given these price reactions, will this;decision benefit investors?;17-22. Redo Problem 21, but assume;that Kay must pay a corporate tax rate of 35%, and investors pay;no taxes.;17-23. Harris;Corporation has $250 million in cash, and 100 million shares outstanding.;Suppose the corporate tax rate is 35%, and investors pay no taxes on dividends;capital gains, or interest income. Investors had expected Harris to pay out the;$250 million through a share repurchase. Suppose instead that Harris announces;it will permanently retain the cash, and use the interest on the cash to pay a regular;dividend. If there are no other benefits of retaining the cash, how will;Harris? stock price change upon this announcement?;17-24. Redo;Problem 21, but assume the following;a. Investors pay a 15% tax on dividends but no;capital gains taxes or taxes on interest income, and Kay does not pay corporate;taxes.;b. Investors pay a 15% tax on dividends and;capital gains, and a 35% tax on interest income, while Kay pays a 35% corporate;tax rate.;17-25. Raviv;Industries has $100 million in cash that it can use for a share repurchase.;Suppose instead Raviv invests the funds in an account paying 10% interest for;one year.;a. If the corporate tax rate is 40%, how much;additional cash will Raviv have at the end of the year net of corporate taxes?;b. If investors pay a 20% tax rate on capital;gains, by how much will the value of their shares have increased, net of;capital gains taxes?;c. If investors pay a 30% tax rate on interest;income, how much would they have had if they invested the $100 million on their;own?;d. Suppose Raviv retained the cash so that it;would not need to raise new funds from outside investors for an expansion it;has planned for next year. If it did raise new funds, it would have to pay;issuance fees. How much does Raviv need to save in issuance fees to make;retaining the cash beneficial for its investors? (Assume fees can be expensed;for corporate tax purposes.).;17-26. Use the;data in Table 15.3 to calculate the tax disadvantage of retained cash in the;following;a. 1998;b. 1976;17-27. Explain;under which conditions an increase in the dividend payment can be interpreted;as a signal of the following;a. Good news;b. Bad news.;17-28. Why is an;announcement of a share repurchase considered a positive signal?;By choosing to do a share;repurchase, management credibly signals that they believe the stock is;undervalued.;17-29. AMC;Corporation currently has an enterprise value of $400 million and $100 million;in excess;cash. The firm has 10 million shares;outstanding and no debt. Suppose AMC uses its excess cash to repurchase shares.;After the share repurchase, news will come out that will change AMC?s;enterprise value to either $600 million or $200 million.;a. What is AMC?s share price prior to the;share repurchase?;b. What is AMC?s share price after the;repurchase if its enterprise value goes up? What is AMC?s share price after the;repurchase if its enterprise value declines?;c. Suppose AMC waits until after the news;comes out to do the share repurchase. What is AMC?s share price after the;repurchase if its enterprise value goes up? What is AMC?s share price after the;repurchase if its enterprise value declines?;d. Suppose AMC management expects good news to;come out. Based on your answers to parts (b) and (c), if management desires to;maximize AMC?s ultimate share price, will they undertake the repurchase before;or after the news comes out? When would management undertake the repurchase if;they expect bad news to come out?;e. Given your answer to part (d), what effect;would you expect an announcement of a share repurchase to have on the stock;price? Why?;17-30. Berkshire Hathaway?s A shares are trading at $120,000.;What split ratio would it need to bring its stock price down to $50?;17-31. Suppose;the stock of Host Hotels & Resorts is currently trading for $20 per share.;a. If Host issued a 20% stock dividend, what;will its new share price be?;b. If Host does a 3:2 stock split, what will;its new share price be?;c. If Host does a 1:3 reverse split, what will;its new share price be?;17-32. Explain;why most companies choose to pay stock dividends (split their stock)..;17-33. When might;it be advantageous to undertake a reverse stock split?;17-34. After the;market close on May 11, 2001, Adaptec, Inc., distributed a dividend of shares;of the stock of its software division, Roxio, Inc. Each Adaptec shareholder;received 0.1646 share of Roxio stock per share of Adaptec stock owned. At the;time, Adaptec stock was trading at a price of $10.55 per share (cum-dividend);and Roxio?s share price was $14.23 per share. In a perfect market, what would;Adaptec?s ex-dividend share price be after this transaction?


Paper#50927 | Written in 18-Jul-2015

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