Electronic Timing Case Pg 619-620 in Corporate Finance tenth edition 1. Tom beli

Question

Electronic Timing Case Pg 619-620 in Corporate Finance tenth edition

1. Tom believes the company should use the extra cash to pay a special onetime dividend. How will this proposal affect the stock price?

How will a share repurchase affect the value of the company?

4. Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

Electronic timing shares outstanding $1,000,000.00 100% $1,000,000.00          100,000.00 $   10.00 3 owners, each owns 25% of the $1million shares outstanding = 75% $750,000.00 $250,000.00 remaining shares 25% aftertax payment of motherboard $30,000,000.00

1. Tom believes the company should use the extra cash to pay a special onetime dividend. How will this proposal affect the stock price?

How will it affect the value of the company?

2. Jessica believes that the company should use the extra cash to pay off debt and upgrade and expand its existing manufacturing capability. How would Jessica’s proposal affect the company?

3.   Nolan is in favor of a share repurchase. He argues that a repurchase will
increase the company’s P/E ratio, return on assets, and return on equity. Are his arguments correct?

How will a share repurchase affect the value of the company?

5.One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus b, where b is the “retention” or “plowback” ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of share of stock today. P0= E1(1-b) / Rs-ROE*b What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.

6. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

4. Another option discussed by Tom, Jessica, and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal?

Explanation / Answer

1.

Payment of dividend will reduce the stock price or book value of the company by the same amount.

Cash payment for dividend reduces the assets side and the corresponding effect would be there in stockholders’ equity.

2.

Payment of debt reduces liability and the use of cash for expansion increases fixed assets of the company.

Reduction of liability improves working capital. Increase in fixed assets increases capitalized value of the company.

3.

Use of cash for repurchasing company’s own shares from the market will reduce the book value of the company, since the repurchasing amount decreases outstanding shares and stockholders’ equity.

Therefore, P/E would decrease, since EPS increases. Return on asset would increase, since the total asset decreases. Return on equity would increase, since stockholders’ equity decreases.

4.

Use of cash for regular payment of dividend indicates the company is growth making. Market share price will increase by this news.

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