Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 1M
Summary Introduction
Case study:
E incorporation is a small company founded by Person T and Person J. They are the manufacturers of integral circuits to capitalize on the complex mixed-signal design technology. Recently, the company decided to include motherboards, PC peripheral devices, and other digital consumer electronics.
In addition to T and J, Person N who provided the capital of the company, became the third primary owner. Each of them owns 25% of 1 million shares outstanding.
The employees of the company and other investors are part of the shareholders, and own the remaining shares.
The company designed the new computer motherboards, which are more effective and less expensive to manufacture; but the cost incurred to design is very high and the owners are unwilling to bring other owners. Thus, ETI sold the design to an outside firm at the rate of after-tax payment of $30 million.
Characters in the case:
Company E: Manufacturers of integral circuits.
Person T: The electronic engineer and founder of the company E
Person J: The electronic engineer and founder of the company E.
Person N: The new owner of the Company E.
To discuss: The impacts of declaring extra cash dividend, and how it affects the stock price.
Summary Introduction
To determine: The impacts of declaring extra cash dividend and how it affects the value of company.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
H-Robotic Incorporated (HRI), a world leader in the robotics industry, produces a line of industrial robots and peripheral equipment that performs many routine assembly-line tasks. However, increased competition, particularly from Japanese firms, has caused HRI's management to be concerned about the company's growth potential in the future. HRI's research and development department have been applying the industrial robot technology to develop a line of household robots. The household robot is designed to function as a maid, mainlyperforming such tasks as vacuuming floors and carpets. This effort has nowreached the stage where a decision on whether to go forward with production must be made. The engineering department has estimated that the firm would need a new manufacturing plant with the following construction schedule:
The plant would require a 35-acre site, and HRI currently has an option to purchase a suitable tract of land for $2.5 million. The building construction would begin…
Warf Computers, Inc., was founded 15 years ago by Nick Warf, a computer programmer. The small initial investment to start the company was made by Nick and his friends. Over the years, this same group has supplied the limited additional investment needed by the company in the form of both equity and short- and long-term debt. Recently the company has developed a virtual keyboard (VK). The VK uses sophisticated artificial intelligence algorithms that allow the user to speak naturally and have the computer input the text, correct spelling and grammatical errors, and format the document according to preset user guidelines. The VK even suggests alternative phrasing and sentence structure, and it provides detailed stylistic diagnostics. Based on a proprietary, very advanced software/hardware hybrid technology, the system is a full generation beyond what is currently on the market. To introduce the VK, the company will require significant outside investment.
Nick has made the decision to seek…
Integrated Waveguide Technologies (IWT) is a 6-year-old company founded by Hunt Jackson and David Smithfield to exploit metamaterial plasmonic technology to develop and manufacture miniature microwave frequency directional transmitters and receivers for use in mobile Internet and communications applications. IWT’s technology, although highly advanced, is relatively inexpensive to implement, and its patented manufacturing techniques require little capital as compared to many electronics fabrication ventures. Because of the low capital requirement, Jackson and Smithfield have been able to avoid issuing new stock and thus own all of the shares. Because of the explosion in demand for its mobile Internet applications, IWT must now access outside equity capital to fund its growth, and Jackson and Smithfield have decided to take the company public. Until now, Jackson and Smithfield have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so…
Chapter 17 Solutions
Fundamentals of Corporate Finance
Ch. 17.1 - Prob. 17.1ACQCh. 17.1 - What are the mechanics of the cash dividend...Ch. 17.1 - How should the price of a stock change when it...Ch. 17.2 - How can an investor create a homemade dividend?Ch. 17.2 - Prob. 17.2BCQCh. 17.3 - Prob. 17.3ACQCh. 17.3 - Why do flotation costs favor a low payout?Ch. 17.4 - Why might some individual investors favor a high...Ch. 17.4 - Prob. 17.4BCQCh. 17.5 - How does the market react to unexpected dividend...
Ch. 17.5 - Prob. 17.5BCQCh. 17.6 - Prob. 17.6ACQCh. 17.6 - Prob. 17.6BCQCh. 17.8 - Prob. 17.8ACQCh. 17.8 - How does the accounting treatment of a stock split...Ch. 17 - Dividends are paid to the parties listed as...Ch. 17 - Prob. 17.3CTFCh. 17 - Prob. 17.4CTFCh. 17 - Prob. 17.8CTFCh. 17 - Dividend Policy Irrelevance [LO2] How is it...Ch. 17 - Prob. 2CRCTCh. 17 - Prob. 3CRCTCh. 17 - Prob. 4CRCTCh. 17 - Prob. 5CRCTCh. 17 - Prob. 6CRCTCh. 17 - Prob. 7CRCTCh. 17 - Prob. 8CRCTCh. 17 - Prob. 9CRCTCh. 17 - Prob. 10CRCTCh. 17 - Prob. 1QPCh. 17 - Prob. 2QPCh. 17 - Prob. 3QPCh. 17 - Prob. 4QPCh. 17 - Regular Dividends [LO1] The balance sheet for...Ch. 17 - Prob. 6QPCh. 17 - Prob. 7QPCh. 17 - Stock Dividends [LO3] The company with the common...Ch. 17 - Stock Splits [LO3] In the previous problem,...Ch. 17 - Homemade Dividends [LO2] You own 1,000 shares of...Ch. 17 - Prob. 11QPCh. 17 - Stock Repurchase [LO4] Galles Corporation is...Ch. 17 - Expected Return, Dividends, and Taxes [LO2] The...Ch. 17 - Dividends and Taxes [LO2] As discussed in the...Ch. 17 - Prob. 15QPCh. 17 - Dividends versus Reinvestment [LO2] After...Ch. 17 - Prob. 1MCh. 17 - Prob. 2MCh. 17 - Prob. 3MCh. 17 - Prob. 4MCh. 17 - Prob. 5MCh. 17 - Prob. 6M
Knowledge Booster
Similar questions
- ClamShell Security (CSS) is a division of a large, listed company, X3Cate Limited (X3L). The CSS Division produces software products to protect customer’s computers from infection from computer viruses and other malware. The sales of its products have been growing over the last few years as its products become more accepted in the market. The Board of X3L want to introduce a new product line that would specifically protect against Ransomware, a new security threat, particularly business customers. Each Divisional Manager can earn large bonuses on top of their base salaries if they maintain Return on Investment greater than 25% otherwise the bonus payments are halved. The following information is for the year that has just ended related to the CSS Division performance: Profit percentage (Return on Sales): 30% Sales revenue: $15 000 000 Average capital invested $18 000 000 Required:Using the same information provided for the past year, if X3l has a company-wide…arrow_forwardFast Wire Incorporated manufactures a scrambling device for cellular phones. The main component of the scrambling device is a very delicate part-DTV-12. DTV-12 requires careful handlings during manufacturing. Once damaged, the part must be discarded. Only skilled laborers are hired to manufacture and install DTV-12. Damages still occur, however. The following are the operating data of Fast Wire Incorporated for 2021 and 2022 relative to the insertion of DTV-12. Number of phones manufactured Units of DTV-12 used Direct labor hours for DTV-12 insertion Total cost of DTV-12 units Direct labor wage rate per hour The partial direct labor operational productivity ratio for 2021 is: Multiple Choice 262 units per DLH. 169 units per DLH. 428 units per DLH. 300 units per DLH. 333 units per DLH. 2021 600,000 960,000 1,800 $ 1,443,750 $ 67 2022 780,000 1,072,500 2,600 $ 2,333,750 $82arrow_forwardAhorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle that an acquirer should follow in recording identifiable assets…arrow_forward
- Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company which is primarily known for its software communications development, but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its highest and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from FASB ASC a. How does the FASB ASC glossary define a defensive intangible asset? b. According to ASC Topi 805 Business Combinations, what is the measurement principle…arrow_forwardJCL Inc. is a major chip manufacturing firm that sells its products to computer manufacturers like Dell, Gateway, and others. In simplified terms, chip making at JCL Inc. involves three basic operations: depositing, patterning, and etching. • Depositing: Using chemical vapor deposition (CVD) technology, an insulating material is deposited on the wafer surface, forming a thin layer of solid material on the chip. • Patterning: Photolithography projects a microscopic circuit pattern on the wafer surface, which has a light-sensitive chemical like the emulsion on photographic film. It is repeated many times as each layer of the chip is built. • Etching: Etching removes selected material from the chip surface to create the device structures. Table 7.4 lists the required processing times and setup times at each of the steps. There is unlimited space for buffer inventory between these steps. Assume that the unit of production is a wafer, from which individual chips are cut at a later stage.a.…arrow_forwardStark and Company is a manufacturer that sells robots predominantly in the Asian market. Times have been tough for the auto industry and Stark and Company is no different. The company is under tremendous pressure to turn a profit. Several years ago, as analysts were predicting a large downturn in the robot industry, Stark decided to purchase a smaller niche robot maker in the hopes of capturing a different segment of the consumer market and to better learn the manufacturing processes of other robot makers. Starks still operates as two separate divisions, Classic and New Age, with each division manager employing a different manufacturing philosophy. The Classic manager is concerned with low input costs and quantity in production in addition to brand recognition and robot power. The New Age manager is concerned with quality and innovation in manufacturing, fuel-efficient and environmentally friendly robots. SAC continued to suffer losses even with the addition of the New Age division.…arrow_forward
- Ahorita Company manufactures wireless transponders for satellite applications. Ahorita has recently acquired Zelltech Company, which is primarily known for its software communications development but also manufactures a specialty transponder under the trade name “Z-Tech” that competes with one of Ahorita’s products. Ahorita will now discontinue Z-Tech and projects that its own product line will see a market share increase. Nonetheless, Ahorita’s management will maintain the rights to the Z-Tech trade name as a defensive intangible asset to prevent its use by competitors, despite the fact that its high-est and best use would be to sell the trade name. Ahorita estimates that the trade name has an internal value of $1.5 million, but if sold would yield $2 million. Answer the following with supporting citations from the FASB ASC:a. How does the FASB ASC Glossary define a defensive intangible asset?b. According to ASC Topic 805, “Business Combinations,” what is the measurement principle…arrow_forwardYou are the technology auditor for a medium size online retailer. With the growth, it has been very difficult for the Information Technology (IT) group to keep up with the hardware requirements and new software for all the various smartphone applications. Much of the in-house technology is outdated from a web application and regulatory standpoint. Many organizations have lowered costs by going to cloud computing solutions, including your competitors allowing them to lower costs and gain market share. One of the key benefits of cloud computing is the opportunity to replace up-front capital infrastructure expenses with low variable costs that scale as the business grows. The CIO has done a complete analysis of moving to a cloud computing solution with Microsoft’s Azure Cloud Platform. The reduction in ongoing costs would be almost fifty percent along with major capital expenditures for upgrades if they were to keep processing in-house. There would be reduction of 70% in the IT staff.…arrow_forwardComputer Graphics (CG) is a small manufacturer of electronic products for computers with graphics capabilities. The company has succeeded by being very innovative in product design. As a spin-off of a large electronics manufacturer (ElecTech), CG management has extensive experience in both marketing and manufacturing in the electronics industry. A long list of equity investors is betting that the firm will really take off because of the growth of specialized graphics software and the increased demand for computers with enhanced graphics capability. A number of market analysts say, however, that the market for the firm’s products is somewhat risky, as it is for many high-tech startups, because of the number of new competitors entering the market and CG’s unproven technology. CG’s main product is a circuit board (CB3668) used in computers with enhanced graphics capabilities. Prices vary depending on the terms of sale and the size of the purchase; the average price for the CB3668 is…arrow_forward
- Brew Bottle Company (BBC) is in the process of planning a more advanced computer-based information system. Slavish & Moore, LLP, BBC’s consulting firm, have recently been provided with an overview of their proposed plan:The Brew Bottle Company Information System (BBCIS) will be created with the help of its employees so that the system will function effectively. This helps ensure that the end product will perform the tasks that the user wants. System construction will begin with prototyping, computer-aided software engineering (CASE) technology, and Gantt charts. From here, systems professionals and a systems administrator who will work fulltime for BBC will create data models of the business process, define conceptual user views, design database tables, and specify system controls. Each user in each department will submit a written description of his or her needs and business problems to the systems professionals. Systems professionals will then perform analysis of feasibility and…arrow_forwardFast Wire Incorporated manufactures a scrambling device for cellular phones. The main component of the scrambling device is a very delicate part—DTV-12. DTV-12 requires careful handlings during manufacturing. Once damaged, the part must be discarded. Only skilled laborers are hired to manufacture and install DTV-12. Damages still occur, however. The following are the operating data of Fast Wire Incorporated for 2021 and 2022 relative to the insertion of DTV-12. 2021 2022 Number of phones manufactured 600,000 780,000 Units of DTV-12 used 960,000 1,072,500 Direct labor hours for DTV-12 insertion 1,800 2,600 Total cost of DTV-12 units $ 1,443,750 $ 2,333,750 Direct labor wage rate per hour $ 67 $ 82 The partial operational productivity ratio of DTV-12 in 2022 is: Multiple Choice 0.63 per unit. 0.73 per unit. 1.92 per unit. 3.00 per unit. 3.33 per unit.arrow_forwardMiniTek manufactures private-label small electronic products, such as alarm clocks, calculators, kitchen timers, stop watches, and automatic pencil sharpeners. Some of the products are sold as a set, and others are sold individually. Products are studied as to their sales potential, and then cost estimates are made. The engineering Department develops production plans, and then cost estimates are made. The Engineering Department develops product introductions. Only two products introduced by the company have been discontinued. One of the products currently sold is a mini-alarm clock. The clock has four alarms and can be programmed to sound at various times and for varying lengths of time. The company has experienced a great deal of difficulty in making circuit boards for the clocks. The production process has never operated smoothly. The production is unprofitable at the present time, primarily because of warranty repairs and product recalls. Two models of the clocks were recalled,…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning