Question

KMS Corporation has assets with a market value of $404 ​million, $27 million of which are...

KMS Corporation has assets with a market value of $404 ​million, $27 million of which are cash. It has debt of $178 ​million, and 18 million shares outstanding. Assume perfect capital markets.

a. What is its current stock​ price?

b. If KMS distributes $27 million as a​ dividend, what will its share price be after the dividend is​ paid?

c. If​ instead, KMS distributes $27 million as a share​ repurchase, what will its share price be once the shares are​ repurchased?

d. What will its new market​ debt-equity ratio be after either​ transaction?

e. Use the data table to estimate the alpha of Nike and HP Inc. stock, expressed as​ % per month.

The estimated monthly alpha for Nike is nothing​%. ​(Round to two decimal​ places.)The estimated monthly alpha for HP Inc. is nothing​%.​(Round to two decimal​ places.)

Monthly Returns

Date

Nike

HP Inc.

​S&P 500

​Jan-11

minus−​3.442%

​8.527%

​2.330%

​Feb-11

​7.941%

minus−​4.509%

​3.474%

​Mar-11

minus−​14.624%

minus−​5.913%

minus−​0.005%

​Apr-11

​8.745%

minus−​1.465%

​2.896%

​May-11

​2.587%

minus−​7.406%

minus−​1.121%

​Jun-11

​6.915%

minus−​2.301%

minus−​1.706%

​Jul-11

​0.189%

minus−​3.379%

minus−​2.000%

​Aug-11

minus−​3.882%

minus−​25.988%

minus−​5.498%

​Sep-11

minus−​0.958%

minus−​13.292%

minus−​6.910%

​Oct-11

​12.677%

​18.530%

​10.915%

​Nov-11

minus−​0.176%

​5.036%

minus−​0.406%

​Dec-11

​0.572%

minus−​7.406%

​1.024%

​Jan-12

​7.907%

​8.618%

​4.637%

​Feb-12

​3.779%

minus−​9.543%

​4.341%

​Mar-12

​0.815%

minus−​5.373%

​3.214%

​Apr-12

​3.163%

​3.903%

minus−​0.668%

​May-12

minus−​2.977%

minus−​8.401%

minus−​6.006%

​Jun-12

minus−​18.857%

minus−​10.750%

​4.045%

​Jul-12

​6.345%

minus−​9.299%

​1.183%

​Aug-12

​4.681%

minus−​7.456%

​2.505%

​Sep-12

minus−​2.516%

​1.848%

​2.543%

​Oct-12

minus−​3.719%

minus−​18.816%

minus−​1.820%

​Nov-12

​6.675%

minus−​6.209%

​0.566%

​Dec-12

​6.299%

​10.716%

​0.902%

​Jan-13

​4.748%

​15.860%

​5.119%

​Feb-13

​1.147%

​21.987%

​1.276%

​Mar-13

​8.355%

​19.027%

​3.795%

​Apr-13

​7.778%

minus−​13.591%

​1.921%

​May-13

minus−​2.720%

​18.544%

​2.361%

​Jun-13

​3.276%

​2.150%

minus−​1.340%

​Jul-13

minus−​1.193%

​3.548%

​5.168%

​Aug-13

​0.175%

minus−​13.006%

minus−​2.999%

​Sep-13

​15.632%

minus−​5.394%

​3.176%

​Oct-13

​4.295%

​16.103%

​4.631%

​Nov-13

​4.461%

​12.228%

​2.964%

​Dec-13

minus−​0.329%

​2.834%

​2.580%

​Jan-14

minus−​7.363%

​3.645%

minus−​3.525%

​Feb-14

​7.811%

​3.034%

​4.552%

​Mar-14

minus−​5.671%

​8.785%

​0.829%

​Apr-14

minus−​1.232%

​2.163%

​0.695%

​May-14

​5.757%

​1.331%

​2.321%

​Jun-14

​0.832%

​1.015%

​2.064%

​Jul-14

minus−​0.542%

​5.730%

minus−​1.344%

​Aug-14

​2.152%

​6.712%

​3.946%

​Sep-14

​13.558%

minus−​6.237%

minus−​1.371%

​Oct-14

​4.226%

​1.156%

​2.355%

​Nov-14

​6.798%

​8.863%

​2.747%

​Dec-14

minus−​2.880%

​3.149%

minus−​0.253%

​Jan-15

minus−​4.056%

minus−​9.968%

minus−​2.963%

​Feb-15

​5.583%

minus−​3.570%

​5.620%

​Mar-15

​3.305%

minus−​10.103%

minus−​1.566%

​Apr-15

minus−​1.485%

​5.809%

​0.983%

​May-15

​3.147%

​1.304%

​1.286%

​Jun-15

​6.246%

minus−​9.623%

minus−​2.018%

​Jul-15

​6.665%

​1.699%

​2.259%

​Aug-15

minus−​3.012%

minus−​8.060%

minus−​6.095%

​Sep-15

​10.291%

minus−​8.104%

minus−​2.533%

​Oct-15

​6.554%

​5.271%

​8.506%

​Nov-15

​0.954%

​2.422%

​0.366%

​Dec-15

minus−​5.262%

minus−​4.593%

minus−​1.729%

Homework Answers

Answer #1

A.Current stock price: (Values in millions)

Current stock price= Equity/number of shares out standing

=$226/18

=$12.55

Explanations:

Equity=assets-liabilities

=$404-$178

=$226 million

B.Share price after dividend paid:

= new equity/number of shares outstanding

=$199/18

=$11.055

Explanation:

New Equity= Assets – assets reduction – liabilities

=$404-$27-$178

=$199

C.Share price once shares repurchased:

=New equity/new number of shares out standing

=$199 / 15.8486 million shares

=$12.556

Explanations:

New equity=$404-$27

=$377 - $178

=$199

New number of shares=

= $27/$12.55 per share

=2.1514

=18 Million shares - 2.1514

=15.8486 million shares

D.New market​ debt-equity ratio:

= debt / equity

= $178 / $199

= 0.8944

Explanation:

Equity= $404 - $27 - $178

=$199

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