Question: Assets Cash Other current assets Fixed Assets Total Assets $15 10 50 Liabilities & Owners' equity Current liabilities $10 Long term debt 30 Equity 35

Assets Cash Other current assets Fixed Assets Total Assets $15 10

Assets Cash Other current assets Fixed Assets Total Assets $15 10 50 Liabilities & Owners' equity Current liabilities $10 Long term debt 30 Equity 35 Total Liab & OE $75 $75 The Board of Directors is currently looking to reward shareholders in one of the following ways; i) Pay a $10 million dividend ii) Issue $10 million of equity and use the proceeds to pay a $10 million dividend. iii) Split the stock 2:1. iv) Use the $10 million to repurchase equity. Discuss the implications of each alternative on business risk, cost of debt, debt/equity ratio, and market value of the firm. Also describe what happens to shareholder wealth for a shareholder owning 100 shares. Assume perfect markets. Create the table on the next page and complete it. What would you expect (Change, no change? If there is a change when?). This is not a numerical questi but one to explain. Cost of Debt Debt/Equity Ratio Business or Operating Risk Market value of firm Shareholder Wealth Pay dividend Issue equity Pay dividend Split stock Repurchase Equity Assets Cash Other current assets Fixed Assets Total Assets $15 10 50 Liabilities & Owners' equity Current liabilities $10 Long term debt 30 Equity 35 Total Liab & OE $75 $75 The Board of Directors is currently looking to reward shareholders in one of the following ways; i) Pay a $10 million dividend ii) Issue $10 million of equity and use the proceeds to pay a $10 million dividend. iii) Split the stock 2:1. iv) Use the $10 million to repurchase equity. Discuss the implications of each alternative on business risk, cost of debt, debt/equity ratio, and market value of the firm. Also describe what happens to shareholder wealth for a shareholder owning 100 shares. Assume perfect markets. Create the table on the next page and complete it. What would you expect (Change, no change? If there is a change when?). This is not a numerical questi but one to explain. Cost of Debt Debt/Equity Ratio Business or Operating Risk Market value of firm Shareholder Wealth Pay dividend Issue equity Pay dividend Split stock Repurchase Equity

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