1.

Share price after announcement

2. D/E Ratio
3. Cost of Equity
4. Tax adj WaCC
5. CF(firm)
6. How many
7. Expected DPS
8. Derive value at t=1 based on 7
9. Cum-div price at t=1 based on 8
10.Value at t=0 based on 9

1)Questions 1-2 are based on the following data. Corporate tax-rate is 30%.
Current price of XYZs share is Rs.12; it is now unlevered. It plans to issue Rs.30
crore in debt and use the proceeds to buy-back 2/3 of its outstanding shares.

What would be XYZs share-price after it makes the announcement regarding its
plan?
Current Share Price = Rs 12
Vl = Vu + D* t
Vl =Vu + 9
Vl = 30*3/2 = Rs 45 crore
Vu = Rs 36 crore
Current Number of Shares = 36/12 = 3 crores
Share price after buyback = 45/3 = Rs 15
2)Questions 1-2 are based on the following data. Corporate tax-rate is 30%.
Current price of XYZs share is Rs.12; it is now unlevered. It plans to issue Rs.30
crore in debt and use the proceeds to buy-back 2/3 of its outstanding shares.
What would be the debt/equity fraction after the buy-back? (in %, two places
after decimal; e.g. write 0.57 or 57% as 57 while 2.50 as 250)

Value of the firm= D +E = 30 Cr + 15 Cr

Debt equity ratio= 2/1= 200

3)Questions 3-5 are based on the just preceding data plus the following
information. The firms shares have been paying a constant dividend of Rs.2.10
per year for a long time. The new debt would be issued @10.0%.

What would happen to the cost-of-equity after the buy-back?

0

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28.00

28.20

28.40

28.90

None of the others

Dividend = 2.10
Price of share= Rs 12
Kd=10 %
Ku=Dividend/ Price of share= 2.10/12=17.5%
Ke=Ku+D/E(Ku-Kd)(1-t)=17.5+2(17.5-10)(1-30%)=28%

4)Questions 3-5 are based on the just preceding data plus the following
information. The firms shares have been paying a constant dividend of Rs.2.10
per year for a long time. The new debt would be issued @10.0%.
What would be cash flow to the firm after the buy-back?
CF = (Earnings- Interest)(1-t) + Interest= (2.1*3.75 30*10%)(1-30%)
+3= 3.4125+3 Cr=6.4125Cr
5)Questions 3-5 are based on the just preceding data plus the following
information. The firms shares have been paying a constant dividend of Rs.2.10
per year for a long time. The new debt would be issued @10.0%.
What would be the firms tax-adjusted WACC after the buy-back?
WACC= kd*D/V*(1-t) + ke*E/V= 10*2/3*(1-30%) + 28*1/3 = 4.66 + 9.33 =
14%

6)Questions 6-10 are based on the following data. A firm has 4 crore shares
outstanding, with a total market-value (market capitalization) of Rs.64 crores.
The firm was expected to pay a total of Rs.8 crore in dividends at the end of the
year (t=1), growing at a rate of 12.50% per year. The company has just heard
that the share-price depends on dividends and, therefore, announces that it
would more than double the dividend-per-share at the end of the year and pay 2
times the amount originally expected. To finance the additional dividends, the
company planned to issue new shares, simultaneously with dividend-payment at
t=1. These new shares would themselves receive dividends only from the end of
their first year (t=2).
How many crores new shares are expected to be issued?
Price per share= 64/4= Rs 16
Total amount of new share to be issued= 8 Cr (double of the amount of
dividends already giving)
No of shares = 8/16=0.5 lakhs
7)Questions 6-10 are based on the following data. A firm has 4 crore shares
outstanding, with a total market-value (market capitalization) of Rs.64 crores.
The firm was expected to pay a total of Rs.8 crore in dividends at the end of the
year (t=1), growing at a rate of 12.50% per year. The company has just heard
that the share-price depends on dividends and, therefore, announces that it
would more than double the dividend-per-share at the end of the year and pay 2
times the amount originally expected. To finance the additional dividends, the
company planned to issue new shares, simultaneously with dividend-payment at
t=1. These new shares would themselves receive dividends only from the end of
their first year (t=2).
What would then become the expected DPS (dividend per share) at t=2 after the
new issue?
2 per share.
9/4.5=2

8)Questions 6-10 are based on the following data. A firm has 4 crore shares
outstanding, with a total market-value (market capitalization) of Rs.64 crores.
The firm was expected to pay a total of Rs.8 crore in dividends at the end of the
year (t=1), growing at a rate of 12.50% per year. The company has just heard
that the share-price depends on dividends and, therefore, announces that it

would more than double the dividend-per-share at the end of the year and pay 2
times the amount originally expected. To finance the additional dividends, the
company planned to issue new shares, simultaneously with dividend-payment at
t=1. These new shares would themselves receive dividends only from the end of
their first year (t=2).
Derive the value at t=1 of the above dividend stream starting at t=2. How much
is it?
0

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16.00

20.00

24.00

25.00

05

None of the others

2/(25-12.5)%=16

9)Questions 6-10 are based on the following data. A firm has 4 crore shares
outstanding, with a total market-value (market capitalization) of Rs.64 crores.
The firm was expected to pay a total of Rs.8 crore in dividends at the end of the
year (t=1), growing at a rate of 12.50% per year. The company has just heard
that the share-price depends on dividends and, therefore, announces that it
would more than double the dividend-per-share at the end of the year and pay 2
times the amount originally expected. To finance the additional dividends, the
company planned to issue new shares, simultaneously with dividend-payment at
t=1. These new shares would themselves receive dividends only from the end of
their first year (t=2).

Using the answer to the above question, derive the cum-dividend-price of each
old share at t=1 under the new dividend policy. How much is it
16+4=20

10)Questions 6-10 are based on the following data. A firm has 4 crore shares
outstanding, with a total market-value (market capitalization) of Rs.64 crores.
The firm was expected to pay a total of Rs.8 crore in dividends at the end of the
year (t=1), growing at a rate of 12.50% per year. The company has just heard
that the share-price depends on dividends and, therefore, announces that it
would more than double the dividend-per-share at the end of the year and pay 2
times the amount originally expected. To finance the additional dividends, the
company planned to issue new shares, simultaneously with dividend-payment at
t=1. These new shares would themselves receive dividends only from the end of
their first year (t=2).

Using the cum-dividend-price in the question above, derive the present-value (at
t=0) of each old share. How much is it?
20/1.25=16