Question

Please answer all 1,2,3,4,5!

1. Which one of the following asserts that 100% debt financing in a firm’s capital structure is preferred?

a. Pecking-Order Theory.

b. M&M Proposition I, without taxes.

c. M&M Proposition II, without taxes.

d. M&M Proposition I, with taxes.

e. M&M Proposition II, with taxes.

2. Rebel Corp. currently has 200,000 shares of stock outstanding that sell for $50 per share. Assume no market imperfections or tax effects exist. What will be the new share price if the firm declares a stock dividend of 15 percent?

a. $57.50

b. $42.50

c. $50.00

d. $43.48

e. $69.00

3. Suppose you own 2,000 shares of stock in Cowboy Corporation. You expect to receive a dividend of $2.05 per share in one year and a liquidating dividend of $40.50 per share in two years. The required return on stock is 10 percent. Suppose you want to create a homemade dividend of two equal annual payments. Roughly how many shares do you need to sell at the end of year one and what will be your dividend income (round to two decimal places throughout)?

a. 856 shares; $29,800

b. 538 shares; $68,138

c. 658 shares; $27,400

d. 995 shares; $40,720

e. 1,238 shares; $20,400

4. Broncos Inc. is evaluating an extra dividend versus a share repurchase. In either case, $6,000 would be spent. Current earnings are $1.50 per share, and the stock currently sells for $30 per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections. You own 100 shares of stock in this company. If the company issues the dividend, your total investment will be worth _______ as compared to _______ if the company opts for a share repurchase.

a. $2,850; $3,000

b. $2,700; $2,700

c. $3,000; $3,150

d. $3,150; $2,850

e. $3,000; $3,000

5. Assume the current spot rate is C$1.1103 and the one-year forward rate is C$1.1025. The nominal risk-free rate in Canada is 3.5 percent while it is 4 percent in the U.S.

What would the forward rate need to be in the previous problem to eliminate an arbitrage opportunity?

a. C$1.1103

b. C$1.1075

c. C$1.1047

d. C$1.2722

e. C$1.0874

Answer 1

1. (e) MM -II with taxes [ since, there is a tax shield for debt and hence, cost of debt after tax will be reduced]

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2. Share price will go down by 50 x 15% = 7.5

New price = 50-7.5 = 42.5 $

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3)

856 shares; $29,800

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4) e) If company isses dividend then value will be 1.5 x100 + (30-1.5) x 100 = 3000 (siince after dividend declaration, price will go down)

But for share repurchase, payment will be 30 x 100 = 3000.