A firm is all equity financed with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000 and it decides to pay a cash dividend of $2000. Calculate the value of each share after the dividend payout. a. $22.8 b. $20 c. $19.8 d. not enough information Grandma’s Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000 and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true? a. Shareholders expected claim is $12,200 b. Creditors expected claim is $37,800 c. Creditors expected claim is $35, 680 d. None of the above The owners of a firm facing a high probability of bankruptcy prefer to invest in ____ projects, because ____. a. safer; riskier projects make bankruptcy more likely b. no new; the firm is likely to go bankrupt anyway c. risky; the shareholders have little to lose and might win if successful d. risky; creditors prefer taking a gamble rather than having the company default You are trying to decide whether to accept or reject a one-year project. The project is estimated to generate $5,000 in incremental gross profit, which includes $200 in depreciation. Incremental SG&A expense is $400. At a 35% tax rate, the after-tax incremental cash flow is: a. $2,990 b. $3,190 c. $3,250 d. $3,510 What is the present value of a growing perpetuity that makes a paymet of $100 in the first year, which thereafter grows at 3% per year? Apply a discount rate of 7%. a. 2,000 b. 3,500 c. 2,500 d. 4,000
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