If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing?

Corporate Finance 10 MCQ

Question 1

Firm A has a value of $100 million and Firm B has a value of $70 million. Merging the two would enable cost savings with a present value of $20 million. Firm A purchases Firm B for $75 million. What is the gain from this merger?

$75 million

$30 million

$15 million

$20 million

Question 2

Galt Industries has 50 million shares outstanding and a market capitalization of $1.25 billion. It also has $750 million in debt outstanding. Galt Industries has decided to delever the firm by issuing new equity and completely repaying all the outstanding debt. Assume perfect capital markets.

Suppose you are a shareholder in Galt industries holding 100 shares, and you disagree with this decision to delever the firm. You can undo the effect of this decision by:

borrowing $1500 and buying 60 shares of stock.

selling 40 shares of stock and lending $1000.

borrowing $1000 and buying 40 shares of stock.

selling 32 shares of stock and lending $800.

Question 3

Wealth and Health Company is financed entirely by common stock that is priced to offer a 15 percent expected return. The common stock price is $40/share. The earnings per share (EPS) is expected to be $6. If the company repurchases 25 percent of the common stock and substitutes an equal value of debt yielding 6 percent, what is the expected value of earnings per share after refinancing? (Ignore taxes.)

$7.20

$7.52

$6.00

$6.90

Question 4

The dividend policy of Berkshire Gardens Inc. can be represented by a gradual adjustment to a target dividend payout ratio. Last year Berkshire had earnings per share of US$3.00 and paid a dividend of US$0.60 a share. This year it estimates earnings per share will be US$4.00. Find its dividend per share for this year if it has a 25% target payout ratio and uses a five-year period to adjust its dividend.