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intermediate financial management

Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions

In Finance for Life: How Tax Policies Influence Dividend Distribution? on page 573, we learned how tax system affects dividend distribution of firms is influenced by tax policies prevalent in a given market. Many firms offer share or stock repurchase plan(stock buyback) where firms use their cash
Zack Marsh just noticed that shares of Boyd Bank were sold “cum dividend” last Monday. He checked the same shares on Wednesday and found that they were now being sold as “ex-dividend” at a lower price. Boyd Bank was doing well, and there was no reason for the share prices to go down
Your colleague has 200 shares in Grisham PLC. He has just received a letter sent on behalf of the company informing him that the company has decided to issue 1 for 8 bonus shares for its shareholders and that for his 200 shares he will get an additional 25 shares as a bonus for no charge. The
What is a stock dividend, and how is it similar to a stock split?
A firm’s dividend policy is generally characterized in terms of two attributes. Explain each.
Explain what a firm’s dividend policy is as if you were talking to your grandmother, who has had no formal education in business.
In Regardless of Your Major: Firms Almost Never Decrease Their Dividend on page 560, we learned that firms try to sustain their dividend payout even during economic downturns. Use the internet to determine what Royal Dutch Shell did with respect to its dividend in 2014 and 2015. (Hint: Google
In the introduction, we pointed out that Emerson Electric Co. (EMR) had paid cash dividends for 53 consecutive years. Look up the company’s cash dividend for the most recent year. What is the dividend for that year?
What are the key factors considered by firms when determining their dividend payout policies?
Why is a stable payout policy for cash dividends preferred by so many firms?
How is it that share repurchases are tax-favored when compared to cash dividends even though the rate of tax paid on dividend income and capital gains income is the same?
What is the tax treatment of the investor’s dividend income, and what is the tax treatment of the investor’s income resulting from the firm’s stock repurchases?
Describe in simple terms why the timing of a firm’s dividend payments that result from its dividend policy should not impact the value of its shares.
What are the fundamental conditions or assumptions used by M&M to demonstrate the irrelevance of dividend policy?
How is a stock dividend like a stock split, and why do financial managers sometimes use one or the other?
Identify three motives that might encourage a firm to buy back its common stock shares.
What is the frequency with which cash dividends are typically paid to investors?
What are the two forms of cash distributions that firms typically use?
Describe corporate dividend policies that are commonly used in practice.
Understand the tax treatment of dividends and capital gains, and the conditions under which dividend policy is an important determinant of stock value.
Distinguish between the use of cash dividends and share repurchases.
a. Do you think Maersk’s proposed changes of capital structure makes good financial sense? Why or why not?
a. Suppose Maersk has decided to issue debt financing and use the proceeds to purchase some of its stock from the open market. What fraction of the firm’s 10.76 billion shares does the firm need to repurchase in order to make it interest-bearing debt ratio equal to that of CMA CGM?If Maersk had
What is the CMA CGM’s times interest earned ratio? If the company faces a principal repayment equal to $400 million, what is its EBITDA coverage ratio for 2019? Use a tax rate of 20 percent for this calculation.
a. Describe the capital structure of CMA CGM using both the debt ratio and the interest-bearing debt ratio.
(Using EBIT-EPS break-even analysis) See Study Problems 15-1 and 15-7. You are now preparing your analysis for Spriggs Plc for your regional head. You have been asked to comment on the likely share price at the end of 2019. The financial reports suggest that there are 8 million shares issued with a
(Using EBIT-EPS analysis) Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North
(Using EBIT-EPS analysis) (Related to Checkpoint 15.2 on page 538) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full
(Calculating leverage and EPS) You have developed the following pro forma income statement for your corporation. It represents the most recent year’s operations, which ended yesterday.Sales $45,750,000 Variable costs (22,800,000)Revenue before fixed costs $22,950,000 Fixed costs (9,200,000)Net
(Analyzing coverage ratios) The income statements for Lowe’s Companies, Inc.(LOW), spanning the period 2014–2016 (just before the housing crash, so these are representative years) are as follows:2016 2015 2014 Net operating income (EBIT) $4,971,000 $4,792,000 $4,149,000 Interest expense
(Analyzing coverage ratios) (Related to Checkpoint 15.1 on page 502) The income statements for Home Depot, Inc. (HD), spanning the period 2014–2016 (just before the housing crash, so these are representative years) are as follows:$ thousands 2016 2015 2014 Net operating income (EBIT) $11,774,000
(Computing interest tax savings) Presently, H. Swank, Inc., does not use any financial leverage and has total financing equal to $1 million. It is considering refinancing and issuing $500,000 of debt that pays 5 percent interest and using that money to buy back half the firm’s common stock.
(Computing interest tax savings) See Study Problem 15-1. You have now discovered that Spriggs Plc has suffered due to new competition and its profitability has been significantly reduced to the extent that the numbers for the last quarter end are likely to report an operating loss before interest
Can you determine which of the two firms is more highly levered (i.e., uses the most financial leverage)? If so, what is your assessment of the two firms’ capital structures?d. (Optional) What is the credit rating for Lowe’s, and how does it compare to that of Home Depot? (Hint: Look up bond
(Describing a firm’s capital structure) Lowe’s Companies, Inc. (LOW), and its subsidiaries operate as a home improvement retailer in the United States and Canada. As of February 1, 2008, they operated 1,534 stores in 50 states and Canada. The company’s balance sheet for February 1, 2008,
(Describing a firm’s capital structure) (Related to Checkpoint 15.1 on page 534) Home Depot, Inc. (HD), operates as a home improvement retailer primarily in the United States, Canada, and Mexico. The balance sheet for Home Depot for February 3, 2008, included the following liabilities and
(Adjusting a firm’s capital structure) Curley’s Fried Chicken Kitchen operates two southern-cooking restaurants in St. Louis, Missouri, and has the following financial structure:Accounts payable $ 100,000 Short-term debt 400,000 Current liabilities $ 500,000 Long-term debt $2,000,000 Owners’
(Calculating capital structure weights) (Related to Checkpoint 15.1 on page 534) See Study Problem 15-2 and describe the capital structure before and after the acquisition. Suggest three concerns that the shareholders ought to raise at the next annual general meeting.
(Calculating capital structure weights) The following figures were extracted from the latest annual report of Ackert Plc.Ackert Plc $ thousands $ thousands Current assets 1,845 Current liabilities 1,245 Non-current assets 15,720 Long-term debt 5,500 Share capital 9,290 Reserves 1,530 17,565 17,565
(Calculating debt ratio) (Related to Checkpoint 15.1 on page 534) Consider Spriggs Plc is one of the clients of NBZ Bank. It has the following financial structure:Spriggs Plc £m £m Current assets 12 Current liabilities 16 Noncurrent assets 60 Long-term debt 40 Share capital 4 Reserves 12 72 72 If
In Finance for Life: Leasing or Buying a Car on page 545, we analyzed the relative advantages of leasing and buying from an individual’s perspective. How do you think the options will compare if Annabel is certain that the value of the car at the end of five years will not be more than €5,000,
Use Figure 15-9 to describe potential differences between leasing a piece of equipment with a capital lease and purchasing the equipment using a bank loan.
In Finance in a Flat World: Capital Structures Around the World on page 542, we learned that capital structures differ dramatically in different countries around the world. What are some possible causes for the observed differences?
A firm is considering replacing its current production facility with a new robotics production facility. As a result of this move, the firm’s fixed costs will increase dramatically. To finance this new project, the firm is considering either issuing common stock or issuing debt. Should the firm
What is financial flexibility, and why is it an important consideration when evaluating a financing decision?
How would shareholders benefit from a rapid growth in profitability in a highly geared (leveraged) company? What is the main future risk?
Is sector benchmarking an important driver in the funding structure decision?
The Ballard Corporation is considering adding more debt to its capital structure and has asked you to provide it with some guidance. After looking at future levels of Ballard’s EBIT, you feel very confident that in the future it will consistently be above the EBIT-EPS indifference point
What is EBIT-EPS analysis, and how is it used in making financing decisions?
Describe how each of the four financial ratios found in Table 15.3 is used to help managers make financing decisions.
What does the term benchmarking mean with respect to making financing decisions?
What is a capital finance lease agreement?
How does the presence of financial distress costs, combined with the tax deductibility of interest (and the resulting interest tax savings), affect a firm’s weighted average cost of capital as the firm increases its use of debt financing from no debt to higher and higher levels of debt?
Does the debt: equity structure affect the EPS? How does this relate to the M&M concept of irrelevancy?
Why do some managers believe that debt is a more tax-efficient manner of funding a business? What are the two presumptive requirements for this to be true?
Describe why capital structure is relevant to the value of the firm. Discuss the potential violations of both of the basic assumptions that support the M&M capital structure theory.
Under the conditions of the M&M capital structure theory, the firm’s financing decisions do not have an impact on firm value. When this theory holds (i.e., is true), how do the firm’s financing decisions affect the firm’s weighted average cost of capital? Describe how the cost of equity and
What does Figure 15.2 have to say about the impact of a firm’s financing decisions on firm cash flows?
What are the two fundamental assumptions that are used to support the M&M capital structure theory? Describe each in commonsense terms.
What is the financial argument for greater stakeholder awareness in the boardroom in a more highly leveraged organization?
What is financial leverage? What is meant by the use of the terms favorable and unfavorable with regard to financial leverage?
What are non-interest-bearing liabilities? Give some examples. Why are noninterest-bearing liabilities not included in the firm’s capital structure?
How does a firm’s financial structure differ from its capital structure?
In Regardless of Your Major: Capital Structure Matters to You! on page 516, we learned about the dangers of using a high proportion of debt financing faced by both General Motors (GM) and Lehman Brothers. How could the failure of these firms possibly matter to you personally or to your parents?
Discuss the role of the following factors in the firm’s capital structure decision: taxes, bankruptcy costs, managerial incentives, and how well informed managers are compared to stockholders.
Who were the financial economists that in 1958 challenged the importance of capital structure management? What is the essence of their theory of capital structure?
What determines whether financial leverage is favorable or unfavorable?
What is financial leverage?
What does the times interest earned ratio measure?
How does the debt ratio differ from the debt-to-enterprise-value ratio?
Use the basic tools of financial analysis to analyze a firm’s financing decisions.
Describe some fundamental differences in industries that drive differences in the way they finance their investments.
Explain why firms have different capital structures and how capital structure influences a firm’s weighted average cost of capital.
Describe a firm’s capital structure.
What are the ways to incorporate these floatation costs into the overall analysis of cost of capital for this project for Trade Logistics?
The investment bankers have just sent the final report that also includes details of floatation costs for this round of capital raising. It suggests that the term loan will require a floatation cost of 40 basis points and ordinary shares of 500 basis points, the preference shares will incur 250
What should be the weighted average cost of capital for Trade Logistics for the new project?
(Calculating flotation costs) Two-Foot Tools, Inc., sells and distributes work footwear and other clothing for people who work under extreme cold conditions such as in the Arctic or Antarctica. The company recently borrowed $10 million net of issuance costs equal to 1.5 percent of the total amount
(Calculating flotation costs) The Pandora Internet Radio Company was started in 2000 to provide a personalized radio listening experience over your computer or iPhone and is privately owned. However, its success could easily lead its owners to take the company public with the sale of common stock
(Calculating flotation costs) (Related to Checkpoint 14.4 on page 502) The Faraway Moving Company is involved in a major plant expansion that requires the expenditure of $200 million in the coming year. The firm plans on financing the expansion by retaining $150 million in firm earnings and
(Calculating the weighted average cost of capital) You are working as a consultant to the Lulu Athletic Clothing Company, and you have been asked to compute the appropriate discount rate to use in the evaluation of the purchase of a new warehouse facility. You have determined the market value of
(Calculating the weighted average cost of capital) You are working in the Finance Department of Ranch Manufacturing, and your supervisor has asked you to compute the appropriate discount rate to use when evaluating the purchase of new packaging equipment for the plant. Under the assumption that the
(Calculating the weighted average cost of capital) Bane Industries has a capital structure consisting of 60 percent common stock and 40 percent debt. The firm’s investment banker has advised the firm that debt issued with a $1,000 par value, an 8 percent coupon (with interest paid semiannually),
(Calculating the weighted average cost of capital) The target capital structure for J&J Manufacturing is 50 percent common stock, 15 percent preferred stock, and 35 percent debt. If the cost of common equity for the firm is 15 percent, the cost of preferred stock is 9 percent, and the before-tax
(Calculating the weighted average cost of capital) Crypton Electronics has a capital structure consisting of 40 percent common stock and 60 percent debt. A debt issue of $1,000 par value, 6 percent bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is
(Calculating the weighted average cost of capital) In the spring of last year, the management of the Silver Steel Company learned that the firm would need to reevaluate the company’s weighted average cost of capital following a significant issue of debt. The firm now has financed 40 percent of
(Calculating the weighted average cost of capital) (Related to Checkpoint 14.1 on page 483) The target capital structure for QM Industries is 40 percent common stock, 10 percent preferred stock, and 50 percent debt. If the cost of common equity for the firm is 18 percent, the cost of preferred
(Calculating the cost of debt) Tellington Inc. recently discussed issuing a 10-year maturity bond with the firm’s investment banker. The firm was advised that it would have to pay 8 to 9 percent on the bonds. Using Figure 14.3, what does this rate suggest to you about the firm’s default rating?
(Computing the cost of debt) Waygone Industries is planning on issuing 30-year bonds that will be rated AA. Use Figure 14.3 to estimate the yield to maturity on the bond issue. What is the spread to Treasury for the debt issue in basis points?
(Computing the cost of debt) Sincere Stationery Corporation needs to raise $500,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with a 10 percent annual coupon rate (with interest paid semiannually) and a 10-year maturity. The investors require a 9 percent
(Computing the cost of debt) Gillian Stationery Corporation needs to raise $600,000 to improve its manufacturing plant. It has decided to issue a $1,000 par value bond with an 8 percent annual coupon rate (with interest paid semiannually) and a 10-year maturity. Investors require a 10 percent rate
(Computing the cost of common equity) (Related to Checkpoint 14.2 on page 490 and Checkpoint 14.3 on page 493) The common stock of the M&M Corporation currently sells for $60, and the dividend paid last year was $2.25. Five years ago the firm paid $2.10 per share, and dividends are expected to grow
(Computing the cost of common equity) The common stock for the Kingsford Corporation sells for $58 a share. Last year the firm paid a $4 dividend, which is expected to continue to grow 4 percent per year into the indefinite future. If the firm’s tax rate is 22 percent, what is the firm’s cost
(Computing the cost of common equity) (Related to Checkpoint 14.2 on page 490)The common stock for Oxford, Inc., is currently selling for $22.50, and the firm paid a dividend last year of $1.80. The dividends and earnings per share are projected to have an annual growth rate of 4 percent into the
(Computing the cost of preferred stock) In the spring of 2017 the Marrion Metal Shaping Company was planning on issuing preferred stock to help finance a major plant expansion. The stock is expected to sell for $98 a share and will have a $100 par value on which the firm will pay a 10 percent
(Computing the cost of debt) The Shiloh Corporation is contemplating a new investment that it plans to finance using one-third debt. The firm can sell new $1,000 par value bonds with a 15-year maturity and a coupon interest rate of 13 percent (with interest paid semiannually) at a price of $950. If
(Computing the cost of preferred stock) The preferred stock of Gator Industries sells for$35 and pays $2.75 per year in dividends. What is the cost of preferred stock financing? If Gator were to issue 500,000 more preferred shares just like the ones it currently has outstanding, it could sell them
(Computing the cost of preferred stock) The preferred stock of Walter Industries Inc.currently sells for $36 a share and pays a 10 percent dividend on the $25 par value of the shares annually. What is the firm’s cost of capital for the preferred stock?
(Computing the cost of debt) Belton Distribution Company is issuing a $1,000 par value bond that pays 7 percent annual interest (with interest paid semiannually)and matures in 15 years. Investors are willing to pay $958 for the bond. The company is in the 18 percent marginal tax bracket. What is
(Computing the cost of debt) Temple-Midland, Inc., is issuing a $1,000 par value bond that pays 8 percent annual interest and matures in 15 years. Investors are willing to pay $950 for the bond, and Temple faces a tax rate of 35 percent. What is Temple’s after-tax cost of debt on the bond where

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