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intermediate financial management
Financial Management And Policy 12th Edition James C. Van Horne - Solutions
4 million shares of common stock outstanding, and the present market price per share is $36. Its equity capitalization is as follows:Common stock, $2.00 par $ 4,800,000 Additional paid-in capital 5,900,000 Retained earnings 87,300,000 Shareholders' equity $98,000,000a. What would happen to these
Johore Trading Company has
Zoppo Manufacturers shareholders' equity, December 30:Common stock ($100 par, 300,000 shares) $ 30,000,000 Additional paid-in capital 15,000,000 Retained earnings 55,000,000 Shareholders' equity $100,000,000 On December 31, Zoppo split the stock 2-for-1 and then declared a 10 percent stock
Singleton Electronics Company repurchased 1 million of 14 million shares outstanding at $98 a share. Immediately before the announcement, market price per share was $91.a. Was the offer price by the company the correct repurchase price?b. After the repurchase, share price went to $105. What would
8 million shares outstanding at a price of $42.50 per share.Immediately prior to the share repurchase announcement, share price was$37.00. The company was surprised that nearly 1 million shares were tendered by stockholders wanting to sell. The company had to repurchase the 100,000 shares on a
In October, Baxter Lorry Company was in a flush cash position and repurchased 100,000 shares of its
The Xavier Industrial Coating Company has hired you as a financial consultant to advise the company with respect to its dividend policy. The coating industry has been very stable for some time, and the firm's stock has not appreciated sigmficantly in market value for several years. The rapidly
(Before the ex-dividend date, investors are entitled to the dividend; after, they are not.) The feeling has been that the stock will decline by the amount of the dividend on the exdividend date, so it really does not matter when the stock is purchased.Shirley McDonald, the finance officer of the
The University of Northern California pays no taxes on the dividend income and capital gains received on its various endowment funds. Over the years, it has steadily bought the stock of IVM Corporation for its alumni fellowship fund. The alumni campaign is such that the bulk of alumni giving occurs
The Mann Company belongs to a risk class for which the appropriate required equity return is 15 percent. It currently has outstanding 100,000 shares selling at $100 each. The firm is contemplating the declaration of a $5 dividend at the end of the current fiscal year, which just began. Answer the
Malkor Instruments Company treats dividends as a residual decision. It expects to generate $2 million in net earnings after taxes in the coming year. The company has an all-equity capital structure, and its cost of equity capital is 15 percent. The company treats this cost as the opportunity cost
For each of the companies described below, would you expect it to have a medium/high or a low dividend-payout ratio? Explain why.a. A company with a large proportion of inside ownership, all of whom are high-income individuals.b. A growth company with an abundance of good investment
The Kleidon King Company has the following shareholders' equity account:Common stock ($8 par value) $ 2,000,000 Additional paid-in capital 1,600,000 Retained earnings 8,400,000 Shareholders' equity $12,000,000 The current market price of the stock is $60 per share.a. What will happen to this
Le Pomme de Terre Corporation has enjoyed considerable recent success because Brazil placed a huge order for potatoes. This business is not expected to be repeated, and Le Pomme de Terre has $6 million in excess funds. The company wishes to distribute these funds via the repurchase of stock.
Do-Re-Mi Corporation makes musical instruments and experiences only moderate growth. The company has just paid a dividend and is contemplating a dividend of $1.35 per share 1 year hence. The present market price per share is$15, and stock price appreciation of 5 percent per annum is expected.a. (1)
The Beta-Alpha Company expects with some degree of certainty to generate the following net income and to have the following capital expenditures during the next 5 years (in thousands):Year I 2 3 4 5 Net income $2,000 $1,500 $2,500 $2,300 $1,800 Capital expenditures 1,000 1,500 2,000 1,500 2,000 The
.-12 -b 0 24 $ +A2 +16 328 Part I11 F i n a n c i n g a n d D i v i d e n d Policies era1 days surrounding the announcement, there is a run-up in the cumulative abnormal return, after which the higher level of security price persists owing to the favorable information effect. The larger the
27 .uld R~bcrth l Cdnruv dn.1 R.)bcrtS tl.irris. "Sock ~ , ,.Splits and Information: Thc Rolc of SharcPrice," Financial Mnnngcm~nt,28(A utumn 19991,2840 DAYS AROUND ANNOUNCEMENT (0)-I- .- .- :. .. .' --. .em.**. .. .
00/1.05), or $1.90. The total value of your holdings then would be$38.10 X 105, or $4,000. Under these conditions, the stock dividend does not represent a thing of value to you. You merely have an additional stock certificate evidencing ownership. In theory, the stock dividend or split is purely
With stock repurchase, share value will increase, all other things remaining the same, and this will benefit the option holder.To the extent a CEO and others in top management strongly influence the choice between dividends and share repurchase at the board level, personal compensation
In this chapter, our focus is on stock repurchase as a substitute for cash dividends.Employee Stock Options and Share Repurchase Stock repurchases often occur in conjunction with stock options granted to employees as part of a total compensation package. Some companies, like Microsoft, roughly
However, it generally is agreed that the effect is more important for dividends than it is for capital structure.EMPIRICAL TESTING AND IMPLICATIONS FOR PAYOUT While we have seen that a number of factors may explain dividends' impact on valuation, many are difficult to test. Most empirical testing
51 The duthors also analyze mandgcmenl hving to tool tne marker by Inrnsa.;lnl: dividend4 and rhr ~rnpltralinnso i .II;~ an C'I~L.L~.JCf~oOr ~.L~ t~kholJ~anrds iur the .qu~l~br'atutrgr ~rvllartlsrn Chapter 11 Dividend P o l i c y : Theory and Practice 317 knows more about the true state of the
Assume that n is the number of shares of record at time 0 and that rn is the number of new shares sold at time 1 at a price of PI. Equation (11-1) then can be rewritten as'Merbn H. Miller and Franco Modigliani, "Dividend Policy, Growth, and the Valuation of Shares," frmrnal of Businrss, 34 (October
Perfect certainty by every investor as to future investments and profits of the firm. (MM drop this assumption later.)Dividends versus Terminal Value The aux of MM's position is that the effect of dividend payments on shareholder wealth is offset exactly by other means of financing. Consider first
A given investment policy for the firm, not subject to change.
A world of no taxes.
An absence of flotation costs on securities issued by the firm.
Perfect capital markets in which all investors are rational. Information available to all at no cost, instantaneous transactions without cost, infinitely divisible securities, and no investor large enough to affect the market price of a security.
310 Part III Financing and Dividend Policies The buyer and the seller of a stock have 3 business days to settle the transaction.Therefore, new stockholders are entitled to dividends only if they buy the stock 3 or more business days before the date of record. If the stock is bought after that time,
Jennifer Doakes owned the stock well before May 31, so she is entitled to the dividend, even though she might sell her stock prior to the dividend actually being paid on June
a. There is not a precise solution to this problem; rather, it is a judgment call. In the problem are listed various possibilities for coming to grips with the cash-flow shortfall. In addition, there may be others, such as the sale of plant and equipment. A cash flow of $7 million is $1.8 million
3 mi on = .89 is much higher than the industry norm of .47.Its book value of debt to market value of stock ratio is even higher. Although the information is limited, it would appear that Torstein is pushing out on the risk spectrum as it has to do with debt. Still its times interest earned
84b. Deviation from mean before ratio is one to one:Times interest earned: $2,000 - $732 = $1,268 Debt-service coverage: $2,000 - $1,089 = $911 Standardizing the deviations:1,268 Times interest earned: - = ,845 1,500 911 Debt-service coverage: - = ,607 1,500 Using Table C, these standardized
73$732$2,000 Debt-service coverage: - $1,089=
a. Total annual interest (in thousands):Serial bonds, 8% on $2,400 $192 Mortgage bonds, 10% on $3,000 300 Subordinated debentures, 12% of $2,000 240-$732 -306 Part 111 Financing and Dividend Policies Total annual principal payments : $100 + $150 = $250 EBIT necessary to service: $250 (1 - .30) =
a. (in thousands):Preferred Common Debt Stock Stock EBIT $1,500 $1,500 $1,500 Interest on existing debt 360 360 360 Interest on new debt -480 - -Profit before taxes $ 660 $1,140 $1,140 Taxes Profit after taxes Preferred stock dividend -- -440 --Earnings available to common stockholders $ 396 $ 244
Gamma Tube Company plans to undertake a $7.5 million capital improvement program and is considering how much debt to use. It feels that it could obtain debt financing at the following interest rates (assume that this debt is perpetual):-Next $1.5 millic !xt $1 million The company has made
Comwell Real Estate Speculators, Inc., and the Northern California Electric Utility Company have the following EBITs and debt-servicing burdens:Northern Corn well California Expected EBIT Annual interest Annual principal payments on debt ( 2,000,000 35,000,000 304 Part I11 Financing and Dividend
The Power Corporation currently has 2 million shares outstanding at a price of$20 each and needs to raise an additional $5 million. These funds could be raised with stock or 10 percent debentures. Expected EBIT after the new funds are raised will be normally distributed with a mean of $4 million
1 million shares outstanding and $8 million in debt bearing an interest rate of 10 percent on average. It is considering a $5 million expansion program financed with either (1) common stock at $20 per share being realized, (2) debt at an interest rate of 11 percent, or(3) preferred stock with a 10
Fazio Pump Corporation presently has
Hi Grade Regulator Company (see Problem 3) expects the EBIT level after the expansion program to be $1 million, with a two-thirds probability that it will be between $600,000 and $1,400,000.a. Which financing alternative do you prefer? Why?b. Suppose the expected EBIT level were $1.5 million and
Hi Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent debt. The company is considering a $3 million expansion program that it can finance with (1) all common stock at $60 a share, (2) straight
Callatin Quarter Company makes saddles. During the preceding calendar year,, ->it earned $200,000 after taxes. The company is in a 40 percent tax bracket, it had no debt outstanding at year end, and it has 100,000 shares of common stock outstanding. At the beginning of the current year, it finds
The Lemaster Company is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock.Moreover, common stock can be sold at $20 per share. In all cases, total capitalization of the company will be $5 million, and it is expected to
Sowla Electronics currently has $2 million in cash and marketable securities, a$3 million bank line of credit of which $1.3 million is in use, pays a cash dividend on its stock of $1.2 million annually, plans capital expenditures of $4 million a year, and devotes $2 million a year to advertising
Torstein Torque and Gear Company has $7.4 million in long-term debt having the following schedule:AMOUNT(IN THOUSANDS)8% serial bonds, payable $100,000 in principal annually $2,400 10% first mortgage bonds, payable $150,000 in principal annually 3,000 12% subordinated debentures, interest only
Dorsey Porridge Company presently has $3.6 million in debt outstanding bearing an interest rate of 10 percent. It wishes to finance a $4 million expansion program and is considering three alternatives: additional debt at 12 percent intei-est, preferred stock with an 11 percent dividend, and the
FLEXIBILITY If a company needs to finance on a continuing basis over time, how does the method chosen this time affect future financing? How important is it that a company have flexibility to tap the debt markets in the future?
TIMING Is it a good time to issue debt? to issue equity? Whenever securities are to be issued, the vitality of the debt and stock markets must be addressed. This consideration is taken up in later chapters.
SECLJIUTYRATING Is a particular method of financing likely to result in a downgrade or upgrade of the company's security rating? No financial manager can ignore this consideration, thoug- h it should not necessarily be a binding constraint.
DEBT RATIOS What effect does a method of financing have on the company's debt ratios?How do the new debt ratios compare with other companies' in the industry?What is the likely effect on investment analysts and lenders?
EBIT-EPS ANALYSIS At what point in earnings before interest and taxes (EBIT) are the earnings per share (EPS) of a company the same under alternative methods of financing?How does this relate to the existing level of EBIT and what is the probability of falling below the indifference point?
CASH FLOW ABILITY TO SERVICE DEBT This is probably the most important analytical tool in determining the debt capacity of a corporation. The analysis here brings together the business and financial risk of a company. It allows you to address the likelihood of insolvency and the cost therein.300
FINANCIAL SIGNALING What is likely to be the stock market reaction to a particular financing decision and why? An effect, if any, is based on asymmetric information between management and security holders.
AGENCY COSTSA ND INCENTIVE ISSUES Does one type of financing expropriate value from other security holders?This is part and parcel of the issue of management taking on risk to expropriate value from existing debt holders, and how the latter can protect themselves.Will management be more efficient
EXPLICIT COST The higher the interest rate on debt, the higher the preferred stock dividend rate, and the higher implicit interest cost in such things as lease financing, the less attractive that method of financing, all other things the same.
TAXES The degree to which a company is subject to taxation is very important.Much of the advantage of debt is tax related. If, because of marginal profitability, a company pays little or no taxes, debt is far less attractive than it is for the company subject to the full corporate tax rate.
this is the
how to reamain
Could you use the marketing research process to analyse your career opportunities and job possibilities? (Think of yourself as a ‘product’ and employers as potential ‘customers’.)What would your research plan look like? pg93
What specific kinds of research can VisitScotland use to learn more about its customers’preferences and buying behaviours? Sketch out a brief research plan for VisitScotland’s next project pg93.‑
discuss the special issues some marketing researchers face, including public policy and ethics issues pg93‑
explain how companies analyse and distribute marketing information‑
outline the steps in the marketing research process‑
define the marketing information system and discuss its parts‑
explain the importance of information to the company and its understanding of the marketplace pg93‑
Is the marketing environment uncontrollable – something that the company can only prepare for and react to? Or can companies be proactive in changing environmental factors?Think of a good example that makes your point, then read on. pg93‑
How are major demographic forces linked with economic changes? With major cultural trends? How are the natural and technological environments linked? Think of an example of a company that has recognised one of these links and turned it into a marketing opportunity. pg93‑
explain how changes in the demographic and economic environments affect marketing decisions pg93‑
describe the environmental forces that affect the company’s ability to serve its customers pg93‑
list the marketing management functions, including the elements of a marketing plan, and discuss the importance of measuring and managing return on marketing pg93‑
describe the elements of a customer-driven marketing strategy and mix, and the forces that influence them pg93‑
explain marketing’s role in strategic planning and how marketing works with its partners to create and deliver customer value pg93‑
discuss how to design business portfolios and develop growth strategies pg93‑
explain company-wide strategic planning and its four steps pg93‑
Think of a company for which you are a ‘true friend’. What strategy does this company use to manage its relationship with you? pg93‑
How well does Ford manage its relationships with customers? What CRM strategy does it use? Compare the relationship management strategies of Tesco and Asda. pg93‑
14-13 Determine the advertising-to-sales ratios for two competing companies and compare them to the industry advertising-to-sales ratio found above. Why do you think there is a difference between competitors and the industry average? (AACSB: Communication; Use of IT;Analytical reasoning; Reflective
14-12 Find industry advertising-to-sales ratio data. Why do some industries have higher advertising-to-sales ratios than others? (AACSB: Communication; Use of IT; Reflective thinking) pg93
14-11 Find other examples of marketers creating controversy by promoting culture-based products that could be viewed as inappropriate by others outside of that culture. (AACSB: Communication; Reflective thinking) pg93 Marketing by the numbers:advertising-to-sales ratios Using the
14-10 Since lighter skin and skin whitening are popular in Thailand, is it wrong for marketers to offer and promote products that encourage this belief and behaviour? Explain why or why not. (AACSB: Communication;Reflective thinking; Ethical reasoning) pg93
A Unilever brand in Thailand ran into some problems with one of its promotion campaigns, the ‘Citra 3D brightening girls search’. Citra Pearly White UV Body Lotion is marketed as a skin-whitening product. Skin whitening is popular in many Asian countries because lighter skin colour is
14-9 Debate whether or not current regulations and guidelines regarding online advertising are adequate for this 428 pg93 PART 3 DESIGNING A CUSTOMER VALUE-DRIVEN STRATEGY AND MIX type of promotion. Is it likely that the regulators will issue new guidelines or regulations? (AACSB:
14-8 Find examples of native advertising on various publishers’websites. Create a presentation with screen shots showing the content and how it is identified. Has the content been shared with others via social media?(AACSB: Communication; Use of IT) pg93
Marketers have always advertised in traditional media such as newspapers, television and magazines, but today they are increasingly creating content for the online platforms of these media through native advertising , also called sponsored content.This form of promotion is not new. It dates back to
14-7 Find three examples of advertisements that incorporate socially responsible marketing in the message. Some companies are criticised for exploiting social issues or organisations by promoting them for their own gain. Do the examples you found do that? Explain. (AACSB: Communication;Ethical
14-6 Marketers use Q Scores to determine a celebrity’s appeal to his or her target audience. Research Q Scores and write a report of a celebrity’s Q Score for the past several years. If the score changed considerably, what could be the reason? What other types of Q Scores are there besides
Communication; Use of IT; Reflective thinking pg93)
14-5 In a small group, select a company and research its marketing communications activities for the past several years.Has the company changed its advertising campaign in that time? Has the type of appeal remained the same or has it changed? Create a presentation of your findings. (AACSB:
14- 4 Name and describe the two basic promotion mix strategies.In which strategy is advertising more important?(AACSB: Communication; Reflective thinking) pg93
14-3 Name and briefly describe the nine elements of the communications process. Why do marketers need to understand these elements? (AACSB: Communication;Reflective thinking) pg93
14-2 Why is there a need for integrated marketing communications and how do marketers go about implementing it? (AACSB: Communication; Reflective thinking) pg93
14-1 List and briefly describe the five major promotion mix tools. (AACSB: Communication)
Socially responsible marketing communication(pp. 424–425) pg93
➤ OBJECTIVE 4 Explain the methods for setting the promotion budget and factors that affect the design of the promotion mix.Setting the total promotion budget and mix(pp. 420–424) pg93
A view of the communication process (pp. 412–414)Steps in developing effective marketing communication pp. 414–420) pg93
➤ Objective 3 Outline the communication process and the steps in developing effective marketing communications pg93
➤ Objective 2 Discuss the changing communications landscape and the need for integrated marketing communications. pg93 Integrated marketing communications (pp. 409–412)
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