A firm is all equity financed with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000 and it decides to pay a cash dividend of $2000. Calculate the value of each share after the dividend payout.
a. $22.8
b. $20
c. $19.8
d. not enough information
Grandma’s Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000 and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?
a. Shareholders expected claim is $12,200
b. Creditors expected claim is $37,800
c. Creditors expected claim is $35, 680
d. None of the above
The owners of a firm facing a high probability of bankruptcy prefer to invest in ____ projects, because ____.
a. safer; riskier projects make bankruptcy more likely
b. no new; the firm is likely to go bankrupt anyway
c. risky; the shareholders have little to lose and might win if successful
d. risky; creditors prefer taking a gamble rather than having the company default
You are trying to decide whether to accept or reject a one-year project. The project is estimated to generate $5,000 in incremental gross profit, which includes $200 in depreciation. Incremental SG&A expense is $400. At a 35% tax rate, the after-tax incremental cash flow is:
a. $2,990
b. $3,190
c. $3,250
d. $3,510
What is the present value of a growing perpetuity that makes a payment of $100 in the first year, which thereafter grows at 3% per year? Apply a discount rate of 7%.
a. 2,000
b. 3,500
c. 2,500
d. 4,000
