Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 14, Problem 8P
a.
Summary Introduction
To determine: The number of new shares issued by the firm.
Introduction:
New equity share issued is based on management decision. Management can issue new share for raising capital or for paying debts.
b.
Summary Introduction
To discuss: The shareholder decision to undo the effect of management decision.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose you are the president of a large corporation located in Seattle, Washington. How do you think the stockholders will react if you decide to increase the proportion of the company’s assets that is financed with debt from 35 percent to 50 percent? In other words, what if the firm used much more debt to finance its assets?
Suppose the CEO of a $750 million all-equity
firm personally owns $15 million in company
stock. Assume that the risk-neutral CEO
makes investment decisions based strictly on
the change in value (or expected change in
value for risky investments) of her personal
holdings, plus private benefits (if any) she gets
from the investment.
a) Suppose the CEO is considering a risky
investment that will generate a gain with a
present value of $100 million with 50%
probability, but a loss of $150 million (present
value) with 50% probability. Will she invest in
the risky project?
b) Now, suppose that the firm recapitalizes by
borrowing $700 million and pays a special
dividend of $700 million, and suppose that
the CEO reinvests her $14 million dividend
back into the recapitalized firm. (In answering
this question, ignore any change in the overall
value of the firm resulting from the
recapitalization.) Given the same assumptions
as in (i) above, will she invest in the risky
project?
A firm is valued at $223, including $58 of cash. The firm is 45% debt financed and the remainder equity. Rather than pay the cash to shareholders, management decides to overpay for an acquisition. (This will increase firm revenues and management will get a nice bonus.) The firm uses $42 cash to buy $31 of corporate assets. (It overpaid for the assets.) What is the percentage decline in the value of the shareholders' claim? Give your answer to the nearest 0.1%. The answer is 9.0
Chapter 14 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 14.1 - How does the risk and cost of capital of levered...Ch. 14.2 - Why are investors indifferent to the firms capital...Ch. 14.2 - What is a market value balance sheet?Ch. 14.2 - In a perfect capital market, how will a firms...Ch. 14.3 - How do we compute the weighted average cost of...Ch. 14.3 - With perfect capital markets, as a firm increases...Ch. 14.4 - If a change in leverage raises a firm's earnings...Ch. 14.4 - True or False: When a firm issues equity, it...Ch. 14.5 - Consider the questions facing Dan Harris, CFO of...Ch. 14.5 - Prob. 2CC
Ch. 14 - Consider a project with free cash flows in one...Ch. 14 - You are an entrepreneur starting a biotechnology...Ch. 14 - Acort Industries owns assets that will have an 80%...Ch. 14 - Wolfrum Technology (WT) has no debt. Its assets...Ch. 14 - Suppose there are no taxes. Firm ABC has no debt,...Ch. 14 - Suppose Alpha Industries and Omega Technology have...Ch. 14 - Prob. 7PCh. 14 - Prob. 8PCh. 14 - Zetatron is an all-equity firm with 100 million...Ch. 14 - Explain what is wrong with the following argument:...Ch. 14 - Consider the entrepreneur described in Section...Ch. 14 - Hardmon Enterprises is currently an all-equity...Ch. 14 - Suppose Visa Inc. (V) has no debt and an equity...Ch. 14 - Prob. 14PCh. 14 - Prob. 15PCh. 14 - Hartford Mining has 50 million shares that are...Ch. 14 - Mercer Corp. has 10 million shares outstanding and...Ch. 14 - In mid-2015 Qualcomm Inc. had 11 billion in debt,...Ch. 14 - Prob. 19PCh. 14 - Prob. 20PCh. 14 - Yerba Industries is an all-equity firm whose stock...Ch. 14 - Prob. 22PCh. 14 - Prob. 23PCh. 14 - Prob. 24P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider the setting of Problem 18. You decided to look for other comparables to reduce estimation error in your cost of capital estimate. You find a second firm, Thurbinar Design, which is also engaged in a similar line of business. Thurbinar has a stock price of $20 per share, with 15 million shares outstanding. It also has $100 million in outstanding debt, with a yield on the debt of 4.5%. Thurbinar’s equity beta is 1.00. (1) Assume Thurbinar’s debt has a beta of zero. Estimate Thurbinar’s unlevered beta. Use the unlevered beta and the CAPM to estimate Thurbinar’s unlevered cost of capital. (2) Estimate Thurbinar’s equity cost of capital using the CAPM. Then assume its debt cost of capital equals its yield, and using these results, estimate Thurbinar’s unlevered cost of capital. (3) Explain the difference between your estimates in part (1) and part (2). (4) You decide to average your results in part (1) and part (2), and then average this result with your estimate from Problem 18.…arrow_forwardA privately held corporation, is making plans for future investments that can increase growth. The company’s manager has recommended that the company “go public” by issuing common stock to raise the funds needed to support the growth. The current owners, who founded the firm, are worried that control of the firm will be diluted by this strategy. If the company undertakes an IPO, it is estimated that each share of stock will sell for $6.25, the investment banking fee will be 22 percent of the total value of the issue. If the founders must issue stock to finance the growth of the firm, what would you recommend they do to protect their controlling interest for at least a few years after the IPO?arrow_forwardA privately held corporation, is making plans for future investments that can increase growth. The company’s manager has recommended that the company “go public” by issuing common stock to raise the funds needed to support the growth. The current owners, who founded the firm, are worried that control of the firm will be diluted by this strategy. If the company undertakes an IPO, it is estimated that each share of stock will sell for $6.25, the investment banking fee will be 22 percent of the total value of the issue. The founders now hold all of the company’s stock: 8 million shares. If the company issues 8 million shares, what proportion of the stock will the founders own after the IPO?arrow_forward
- AMC Corporation currently has an enterprise value of $390 million and $120 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 $590 million or $190 million. Suppose AMC management expects good news to come out. If management wants 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? What effect would you expect an announcement of a share repurchase to have on the stock price? To maximize its share price, when will AMC prefer to repurchase shares? (Select the best choice below.) O A. After either good or bad news comes out. B. After good news and before bad news comes out. C. Before either good or bad news comes out. D. Before good news and after bad news comes out.…arrow_forwardREH Corporation's most recent dividend was $3.75 per share, its expected annual rate of dividend growth is 6%, and the required return is now 15%. A variety of proposals are being considered by management to redirect the firm's activities. Determine the impact on share price for each of the following proposed actions, and indicate the best alternative. a. Do nothing, which will leave the key financial variables unchanged. b. Invest in a new machine that will increase the dividend growth rate to 6% and lower the required return to 14%. c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and raise the required return to 17%. d. Merge with another firm, which will reduce the growth rate to 4% and raise the required return to 16%. e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 8% and increase the required return to 17%.arrow_forwardYou are an analyst in the Finance department at a conglomerate, where the CFO believes the cost of equity is 10% and the WACC is 7.5%. A project has been proposed to create a new business line, and your manager asks you to calculate the NPV assuming the project is funded entirely by equity. Should you discount the CF’s using a) 10%, b) 7.5% or c) some other rate? Why?arrow_forward
- Alpha Inc.'s stock price is $40, and the firm has 4 million shares outstanding. You are confident that, if youtake it over and replace the managers. vou can improve its pertormance and increase its value. However.Alpha Inc. has a poison pill with a 20% trigger. As a consequence, in the event that someone buys more than 20% of the capital without management approval, it would be triggered, and all Alpha Inc.'s shareholders - other than the acquirer would be offered to buy one new share in Alpha for each share they already own, at a 50% discount. If the price remains at $40 while you are acquiring shares in your takeover attempt, and the management of the company decides to resist your buyout attempt when you pass the 20% threshold of ownership: How many new shares will be issued and at what price?What will happen to your percentage ownership of Alpha inc.?What will happen to the price of your shares of Alpha Inc.?Do you lose or gain from triggering the poison pill? If you lose, where…arrow_forwardHardmon enterprises is currently an all equity firm with an expected return of 16%. Its a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?arrow_forwardAbsolute Corporation currently has $60 million in liabilities and common equity in combination. The firm has no preferred stock. The CFO constructed the following table to show the CEO the effect of changing the firm's capital structure. Amount of Debt in the Capital Structure $18,000,000 24,000,000 30,000,000 According to this information, what is Absolute's optimal capital structure? Explain your answer. Round your answer to the nearest whole number. The optimal capital structure contains % of debt because it -Select- -Select- has the lowest amount of debt in the capital structure provides the highest market price per share of stock provides the highest earnings per share Earnings per Share (EPS) $5.00 5.70 6.70 Market Price per Share (Po) $101.80 112.75 110.50arrow_forward
- The Problem After completing her estimate of Templeton's WACC, the CFO decided to explore the possibility of adding more low- cost debt to the capital structure. With the help of the firm's investment banker, the CFO learned that Templeton could probably push its use of debt to 37.5% of the firm's capital structure by issuing more debt and retiring (purchasing) the firm's preferred shares. This could be done without increasing the firm's costs of borrowing or the required rate of return demanded by the firm's common stockholders. What is your estimate of the WACC for Templeton under this new capital structure proposal?arrow_forwardKMS corporation has assets of $650 million, $65 million of which are cash. It has debt of $216.7 million. If KMS repurchases $21.7 million of its stock: a. What changes will occur on its balance sheet? b. What will be its new leverage ratio? a. What changes will occur on its balance sheet? (Select the best choice below.) A. Both the cash balance and shareholder equity will drop by $21.7 million. B. Both the cash balance and shareholder equity will increase by $21.7 million. C. Both accounts receivable and shareholder equity will drop by $21.7 million. D. Debt will increase by $21.7 million and shareholder equity will decrease by $21.7 million. b. What will be its new leverage ratio? The new leverage ratio after the repurchase is %. (Round to one decimal place.)arrow_forwardYou work for a leveraged buyout firm and are evaluating a potential buyout of Associated Steel. Associated Steel's stock price is $20 and it has 10 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 100%. You are planning on doing a leveraged buyout of Associated Steel, and will offer $20 per share for control of the company. Assuming that you use equity (your own money) to pay for this deal, what will be your gain from the deal? What about other shareholders? Now assume you use debt to finance the deal. How does this change your gains vs. other shareholders when compared to part (B)?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
What Are Stock Buybacks and Why Are They Controversial?; Author: TD Ameritrade;https://www.youtube.com/watch?v=2O4bmcliaog;License: Standard youtube license