Universitas Pelita Harapan

Corporate Finance II
Week 10
Chapter 17-Dividend Payout Policy
(Additional Exercise)

Lecture: Dr. Ferdinand Butarbutar., SE., MBA.

 Even Semester: January 10 – May 2019
Dividend Policy

1. Bowles Sporting inc, is prepared on report to the following income

statement (shown in thousand of dollars) for the year of 2015
Sales $15,200
Operating Cots including depreciation 11.000
EBIT $ 3,300
Interest 300
EBT $ 3,000
Taxes (40%) 1,200
Net Income $ 1,800

Prior to reporting this income statement, the company wants to determine

its annual dividend. The company has 500,000 shares of stock outstanding
and its stock trades at $48 per share.
a. The company had a 40 percent dividend payout ratio in 2014. If
Bowles wants to maintain this payout ratio in 2015, what will be its
per share dividend in 2015?
b. If the company maintains 40 percent payout ratio, what will be the
current dividend yield on the company stock?
c. The company reported net income of $1.5 million in 2014. Assume
that the number of shares outstanding has remaind constant. What
was the company’s per share dividend in 2014?
d. As an alternative to maintaining the same dividend payout ratio,
Bowles is condisering maintaining the same per share in 2015 that is
paid in 2014. It it chooses this policy, what will be the company’s
dividendt payout ratio in 2015?
 Dividend Policy
Answer

1. (a). Share dividend. Net Income x DPO

$1,800,000 x .40 = $720,000
DPS 15 = Dividend/Shares
$720,000/500,000 = $1.44
(b). Dividend Yield = DPS/Po
$1.44/$48 = 3%
(c). Dividend in 2014?
Net Income x DPO
$1,500,000 x .40 = $600,000
DPS 14 = Dividend/Shares
$600,000/500,000 = $1.20
(d). DPO in 2015?
Payout ratio = Dividend/Income
$600,000/$1,800,000 = 33.33%

2. In 2013 the Keenan Company paid dividends totaling $3,600,000 on

net income of $10.8 million. 2013 was a normal year, and for the past
10 years, ernings have grown at a constant rate of 10 percent.
However, in 2014, earnings are expected to jump to $14.4 million, and
the firm expects to have profitable investment opportunities of $8.4
million. It is predicted that Keenan will not be able to maintain the
2014 level of earnings growth-the high 2014 earnings level is
attributable to an exceptionally profitable new product line introduced
that year-and the company will return to its previous 10 percent
growth rate. Keenan’s target capital structure is 40 percent debt and
60 percent equity.
a. Calculate Keenan’s total dividends for 2014 if it follows each of
the following policies:
 1. Its 2014 dividend payment is set to force dividends to grow at
the long-run growth rate in earnings.
2. It continous the 2013 dividend payout ratio
3. It uses a pure residual dividend policy (40 percent of the $8.4
million investment is financed with debt and 60 percent with
common equity)
4. It employs a regular dividend plus extras policy, with the
regula dividend being based on the long-run growth rate and the
extra dividend being set according to the residual policy
b. Which of the preceding policies would you recommend?
Restrict your choices to the ones listed, but justify your answer.
c. Assume that investors expect Keenan to pay total dividends of
$9,000,000 in 2014 and to have the dividend grow at 10 percent
after 2014. The stock’s total market value is $180 million. What is
the company’s cost of equity?
d. What is Keenan’s long-run average return on equity? (Hint: g =
Revenue retention x ROE) = (1.0 – Payout ratio (ROE)
e. Does a 2014 dividend of $9,000,000 seem reaonable in view of
your answer to part c and d? If not, should the dividend be higher
or lower?
 Dividend Policy
Answer
3. a. (1). Total Dividend 2014=1.10 x (2003 dividends)
1.10 x $3,600,000 =$3,960,000
(2). Payout ratio 13= $3,600,000/$10,800,000 = 33.33%
Dividend 14 = 0.3333 x NI 2014
0.3333 x $14,400,000 =$$4,800,000
(3). Equity financing = $8,400,000 x ,60 = $5.040,000
2014 Dividends = NI – Equity financing
= $14,400,000 – 5,040,000 = $9,360,000
(4). The regular dividends would be increased by 10%
above 2013.
Regular Dividend = 1.10 x $3,600,000 =$3,960,000
The residual policy calls for dividends of $9,360,000
Therefore, extra dividend
= $9,360,000 - $3,960,000 = $ $5,400,000

b. policy 4, based on the regular dividend

c. ks = D1/Po + g = $9,000,000/$180,000,000 + 10% = 15%
d. g = retention rate (ROE)
0.10 = {1 – ($3,600,000/$10,800,000)} (ROE)
ROE = 0.10/0.6667 = 0.15 (15%)
e. A 2014 dividend of $9,000,000 may be alittle low. The
cost of equity is 15% and the average return of equity 15%
--------------------------------good luck buddy----------------------------

Answered

1 (a). Total Dividends05 = Net Income x DPO

= $1,800,000  0.40
= $720,000.
DPS05 = Dividends03/Shares outstanding
= $720,000/500,000
= $1.44.
(b). Dividend yield = DPS/P0
= $1.44/$48.00
= 3%.
(c). Total dividends04 = Net income04  DPO
= $1,500,000  0.4
= $600,000.
Dividends04/Shares outstanding
= $600,000/500,000
= $1.20.
(d). Payout ratio = Dividends/Net income
= $600,000/$1,800,000
= 0.3333 = 331/3%.

2. a.(1). 2014 Dividends = (1.10)(2002 Dividends)

= (1.10)($3,600,000) = $3,960,000.

(2).2013 Payout = $3,600,000/$10,800,000 = 0.3333

= 331/3%.

2014 Dividends = (0.3333)(2003 Net income)

= (0.3333)($14,400,000) = $4,800,000.
(Note: If the payout ratio is rounded off to 33
percent, 2003 dividends are then calculated as
$4,752,000.)

(3). Equity financing = $8,400,000(0.60)

= $5,040,000.

2014 Dividends = Net income - Equity financing

= $14,400,000 - $5,040,000
= $9,360,000.
All of the equity financing is done with retained
earnings as long as they are available.

(4).The regular dividends would be 10 percent above the

2013 dividends:

Regular dividends = (1.10)($3,600,000)

= $3,960,000.

The residual policy calls for dividends of

$9,360,000. Therefore, the extra dividend, which
would be stated as such, would be
 Extra dividend = $9,360,000 - $3,960,000 = $5,400,000.
An even better use of the surplus funds might be a stock
repurchase.

b. Policy 4, based on the regular dividend with an

extra, seems most logical. Implemented properly, it
would lead to the correct capital budget and the
correct financing of that budget, and it would give
correct signals to investors.
D1 $9,000,000
c. ks = + g = + 10% = 15%.
P0 $180,000,000

d. g = Retention rate(ROE)
0.10 = [1 – ($3,600,000/$10,800,000)](ROE)
ROE = 0.10/0.6667 = 0.15 = 15%.
e. A 2014 dividend of $9,000,000 may be a little low.
The cost of equity is 15 percent, and the average
return on equity is 15 percent. However, with an
average return on equity of 15 percent, the marginal
return is lower yet. That suggests that the capital
budget is too large, and that more dividends should be
paid out. Of course, we really cannot be sure of
this--the company could be earning low returns (say 10
percent) on existing assets yet have extremely
profitable investment opportunities this year (say
averaging 30 percent) for an expected overall average
ROE of 15 percent. Still, if this year’s projects are
like those of past years, then the payout appears to
be slightly low.

---------------------------------good luck buddy-----------------------------

Even Semester January to May 20
Corfin II, February 28, 2019
Cases

1. AMC Corporation currently has an enterprise value of $400 million

and $100 million in excess cash. The firm has 10 million shares
outstanding and no debt. Suppose AMC uses its excess cash to
repurchase shares. After the share repurchase, news will come out that
will change AMC’s enterprise value to either $600 million or $200
million.
(a). What is AMC’s share price prior to the share repurchase?
(b). What would AMC’s share price be after the repurchase
it its enterprise values goes up? What would AMC’s
share price be after repurchase if its enterprise value
declines?
(c). Suppose AMC waits until after the news comes out to
do the share repurchase. What would AMC’s share price
be after the repurchase if its enterprise values goes up?
What would AMC’s share price be after the repurchase if
its enterprise values declines?

2. Components Manufacturing Corporation (CMC) has an all common

equity capital structure. It has 200,000 shares of $2 par value
common stock outstanding. When CMC’s founder, who was also its
research director and most successful invenventor, retired
unexpectedly to the South Pacific in late 2002, CMC was left
suddendly and permanently with materially lower expectationss and
relatively few attractive new investment opportunities. Unfortunately,
there was no way to replace the fonde’r contribution to the firm.
Previously, CMC found it necessary to plow back most of earnings to
finance growth, which avaraged 12 percent per year. In the dividend
payout. Further, it now appears that new investment projects with at
least the 14 percent rate of return rquired by CMC’s stockholders (ks
= 14%) would amount to only $8000,000 for 2003 in comparison to a
projected $2,000,000 of net income. If the existing 20 percent
dividend payout were continued, retined earnings would be $1.6
millions in 2003, but, as noted investments that yield the 14 percent
cost of capital would amount to only $800,000.
The one encouraging point is that the hight earnings from existing
assets are expected to continoue, and net income of $2 million is still
expected for 2023. Given the dramatically changed circumstances,
CMC management is reviewing the firm’s dividend policy.
(a). Assuming that the acceptable 2003 investment projects
would be finance entirely by earnings retained during the
year, calculate DPS in 2003, assuming that CMC uses the
residual dividend model.
(b). What payout ratio does your answer to part a imply for
2003?
(c). If a 60 percent payout ration is maintained for the
foreseeable future, what is your estimate of the present
market price of the common stock? How does this
compare with the market price that should have prevailed
 under the assumptions existing just before the news
about the founder’s retirement? If the two values of Po
are different, comment on why.
(d). What should happen to the price of the stock if the old 20
percent payout were continued? Assume that if this
payout is maintained, the average rate of return on the
retained earnings will fall to 7.5 percent and the new
growth rate will be. g = (1.00 – DPO) (ROE)
g= (1 – 0.2) x (7.5%) = 6.0%

----------------------------------goodluck buddy---------------------------

Dividend Policy-Answer

1. (a). Plan: Calculate AMC’s share price prior to share repurchase.

Execute: Because Enterprise Value  Equity  Debt  Cash, AMC’s
equity value is:
Equity  EV  Cash  $500 million, therefore:
Share price  ($500 million)/(10 million shares)  $50 per share.

Evaluate: AMC’s share price would be $50.00 before share 
repurchase.
    (b).  Plan: Calculate the values of AMC’s share price assuming AMC’s 
enterprise value goes up and then declines.

Execute: AMC repurchases $100 million/($50 per share)  2 million
shares. With 8 million remaining shares outstanding (and no excess 
cash), its share price if its EV goes up to $600 million is:
Share price  $600/8  $75 per share
And if EV goes down to $200 million:
Share price  $200/8  $25 per share

Evaluate: AMC’s share price would rise to $75.00 if enterprise 
value rose. It would fall to $25.00 if enterprise value were to fall. 

        (c). Plan: Calculate the values of AMC’s share price assuming AMC’s 
enterprise value goes up and declines and AMC waits until after the 
news comes out to execute the repurchase.

Execute: If EV rises to $600 million prior to repurchase, given its 
$100 million in cash and 
10 million shares outstanding, AMC’s share price will rise to:
Share price  (600  100)/10  $70 per share

If EV falls to $200 million:
Share price  (200  100)/10  $30 per share

The share price after the repurchase will also be $70 or $30 because 
the share repurchase itself does not change the stock price.

Evaluate: AMC’s share price would rise to $70.00 if enterprise 
value rose. It would fall to $30.00 if enterprise value were to fall. 
Note: The differences in the outcomes for Problem 17 versus 
Problem 18 arise because by holding cash (a risk­free asset), AMC 
reduces the volatility of its share price.
2. (a).   Projected Net Incone                       $2,000,000
         Less Projected Capital Investment       800,000
          Available residual                           $1,200,000               
     
Shares outstanding 200,000
DPS = $1,200,000;200,000 = $6.00

(b) Payout ratio

EPS = $2,000,000;200,000 = $10.00
Payou ratio = DPS/EPS = $6.00/$10.00 = 60% or
TotL Dividend/NI = $1,200,000/$2,000,000 =60%

(c). Currently, Po = D1/(ks – g) = $6.00/(0.14 – 0.05) = $6/0.09=$66.67

Under the former circumstances, D1 would be basd on a 20 percent
payout on $10 EPS, or $2. With ks = 14%, and g = 12%, we solve
for Po.
Po = D1/(ks-g) = $2.00/(0.14 – 0.12) = $2.00/0.02 = $100.

(d). If the payment ratio were continue at 20 percent, even after internal
investment opportunities had decline, the price of the stock would drop
to to $$2.00/(0.14 – 0.06) = $25.00rather than to $66,67, Thus, an
increase in the dividend payout is consistent with maximizing
shareholder wealth.

2(a).   Projected Net Incone                       $2,000,000
         Less Projected Capital Investment       800,000
         Available residual                           $1,200,000               
     
Shares outstanding 200,000
DPS = $1,200,000;200,000 = $6.00

(b) Payout ratio

EPS = $2,000,000;200,000 = $10.00
Payou ratio = DPS/EPS = $6.00/$10.00 = 60% or
TotL Dividend/NI = $1,200,000/$2,000,000 = 60%

(c). Currently, Po = D1/(ks – g) = $6.00/(0.14 – 0.05) = $6/0.09=$66.67

Under the former circumstances, D1 would be basd on a 20 percent
 payout on $10 EPS, or $2. With ks = 14%, and g = 12%, we solve
for Po.
Po = D1/(ks-g) = $2.00/(0.14 – 0.12) = $2.00/0.02 = $100.

(d). If the payment ratio were continue at 20 percent, even after internal
investment opportunities had decline, the price of the stock would drop to to
$$2.00/(0.14 – 0.06) = $25.00rather than to $66,67, Thus, an increase in the
dividend payout is consistent with maximizing shareholder wealth.

--------------------------------goodluck buddy----------------------------

I. Chapter 8/9 Capital Investment

 You are a consultant of project manager Edelman Engineering is
considering two pieces of equipment, a truck and an pulley
system. The projecst are independend. The cash outlay for the
truck is $17,100, and for the pulley system is $22,400. The cost of
capital is 14 percent. This is the cash flows of those investments.

YEAR TRUCK PULLRY

1 $5,100 $7,500
2 4,500 7,300
3 4,750 8,200
4 5,300 9,100
5. 5,700 4,200

1.1. Calculate each projects payback period, Net Present Value

(NPV) and Internal Rate of Return (IRR).
1.2 Which project should accepted if they are independent?
1.3. If the project is Mutually exclussive, which one do you chose

II.Stock valuation
Dozier Corporation is a fast-growing supplier of office products.
Analyst project the following free cash flows during the next 3 years,
after which FCF is expected to grow at a constant 7 percent rate.
Dozier’s Capitals structures; Debt 60%, interest rate 14%; Equity
40%, return on equity19%, Taxes 35%. Current price at capital market
is $30.32
WACC = WdKd (1 – t) + WcKs

Time 1 Year Year 2 Year 3

Free Cash Flow -$20 million $30 million $40 million

2.1. What is Dozier’s terminal value?

2.2. What is the value of the Firm today?
2.3. Suppose Dozier has $100 million debt and 10 million share of
stock. What is the price per share?
2.4. Drawing Negotiation room beween Acquirer and Target.

III. The last four years of returns for a stock are as follows:

1 2 3 4
-4% +28% +12% +4%
 3.1. What is the average annual return?
3.2. What is the variance of the stock’s return?
3.2. What is the standard deviation of the stock return

IV. Loan Amortization (annuited)

A firm will borrows $15,000, and the loan is to repaid in five
equal payments per year. The lender charges you 6 percent
interest rate on the loan balances that is outstanding at the
beginning of each year. Make your loan amortization, and fill
in this blank form. Formula: P = C x 1/r [( 1 – 1/(1+r)n]

Loan Amortization
Year Loan Payment Interest Repayment Balance
1
2
3
4
5.

V.Capital sturcture
Gentry Motors Inc. A producer turbine generator in this situation
EBIT = 4 million, tax rate = 35%; Debt outstanding $2 million;
interest rate (kd) is 10%, cost of equity (ks) is 15%, Outstandig shares
600,000, book value per share = $10. Products markets is stable, no
growth, all earnings are paid out as dividends.
5.1. What are Gentry earnings per share (EPS) and its price per
share (Po)?
5.2. What is Gentry’s WACC?
5.3. Gentry can increase its debts by $8 million to a total of $10
million, using the new debt to buy back retire some of its shares
at the current price. Its interest on debt will be 12 percent, and
it cost of equity will rise from 15 percent to 17 percent. EBIT
will remain constant Shoud Gentry change its capital structure?

Jawaban untuk no.5

 Corporate Finance II – International Class
Mid Semester Test. ( 2019)
I. Understanding (20 points)
1.1. Sumber dana bisnis pada perusahaan yg baru dalam memenuhi modalnya
terdiri dari: a. Angel investors, b. Venture capital firms, c. Institutional
investors, and d. Corporate investors. Jelaskan dengan rinci apa yg saudara ketahui
dan berikan contoh.
1.2. Apa manfaat dan kendala perusahaan yg sudah go public
1.3. Apa manfaat Hutang bagi perusahaan? Jelaskan dengan rinci buat contoh anda
sendiri.
1.4. Bagaimana anda mengendalikan penggunaan hutang perusahaan?
1.5. Dampak perusahaan yg tidak bisa mengendalikan jumlah hutang adalah: Financial
Distress dan Agency Cost. Jelaskan apa maksud nya?

II. Chapt 8/9 Capital Budgeting (28 points)

2. Anda You are financial analyst for Damon Electronics and Co You are entitled to
analyze two proposal capital invesments, Project X and Y. Each project has a
cost of $10,000, and cost of capital (WACC) each projects is 12 percent. The
projects’ expected net cash flows are as follows:
.

YEAR Project X Project Y

0 ($10,000) ($10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
Notes:
Calculate each project’s Payback Period, Net Present Value, Internal Rate of
returns.

3. Chapter 10 Stock Valuation (12points)

The treasurer of pension fund has done a great deal of research on the company
and realizes that its valuation must be based on the total company model. The
pension fund’s treasurer has estimated Barretts’s free cash flows for the next 4
years as follows: $3million, $6 million, $10 million, and 15 million. After fourth
year, free cash flowis projected to grow at a constant rate of 7 percent. Barrets
WACC is 12 percent, it has $60 million of total Debts, and 10 million shares of
common stock.
a. What is the present value of free cash flow during the next 4 years?
b. What is the company’s terminal value?
 c. What is the total value of the company?
d. What is the company price per share?

4..Risk and Return Chapt 11 (12 points).

The last four years of returns for a stock are as follows
1 2 3 4
-7% +23% +18% +6%
a. What is the average annual return?
b. What is the variance of the stock’s returns?
c. What is the standard deviation of the stock’s returns?

5.Capital sturcture (28 points)

Gentry Motors Inc. A producer turbine generator in this situation EBIT = 4

million, tax rate = 35%; Debt outstanding $2 million; interest rate (kd) is 10%,
cost of equity (ks) is 15%, Outstandig shares 600,000, book value per share =
$10. Products markets is stable, no growth, all earnings are paid out as dividends.
a. What are Gentry earnings per share (EPS) and its price per share (Po)?
b. What is Gentry’s WACC?
c. Gentry can increase its debts by $8 million to a total of $10 million, using the
new debt to buy back retire some of its shares at the current price. Its interest
on debt will be 12 percent, and it cost of equity will rise from 15 percent to 17
percent. EBIT will remain constant Shoud Gentry change its capital
structure?

1. Loan amortization (annuited).

Kiel Bank will give you $10,000 to day in exchange for 4 equal payments.
Interest rate of landing charged you 6 percent. What is the present value of
annuity payment. Formula: P = C x 1/r [( 1 – 1/(1+r)n]
Loan Amortization
1.
2.
3.
4.

Corporate Finance II – Regular Class

Mid Semester Test. ( 2019)
III. Understanding (20 points)
1.2. Sumber dana bisnis pada perusahaan yg baru dalam memenuhi modalnya
terdiri dari: a. Angel investors, b. Venture capital firms, c. Institutional
investors, and d. Corporate investors. Jelaskan dengan rinci apa yg saudara ketahui
 dan berikan contoh.
1.2. Apa manfaat dan kendala perusahaan yg sudah go public
1.3. Apa manfaat Hutang bagi perusahaan? Jelaskan dengan rinci buat contoh anda
sendiri.
1.4. Bagaimana anda mengendalikan penggunaan hutang perusahaan? Berikan contoh
angka anda sendiri.
1.5. Dampak perusahaan yg tidak bisa mengendalikan jumlah hutang adalah: Financial
Distress dan Agency Cost. Jelaskan apa maksud nya?

IV. Chapt 8/9 Capital Budgeting (28 points)

2. Anda sebagai direktur analisis perusahaan Damon Electronic dan Co,, termasuk di
dalam tim untuk mengevaluasi dua projek investasi, antara lain: Project X and Y.
Biaya Investasi untuk setiap project $10,000, biaya modal (WACC) sebesar 12%.
Proyeksi arus kas (cash flow) diperkirakan sebagai berikut:
.

YEAR Project X Project Y

0 ($10,000) ($10,000)
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
Nota
a. Hitunglah Payback Period, Net Present Value, dan Internal Rate of return –
(IRR), dari setiap projek.
b. Kalau projeci itu Mutual exclusive, yang mana anda akan pilih?

3. Chapter 10 Stock Valuation (12points)

Perusahaan Dana Pensiun sedang mengkalkulasi nilai Perusahaan Barrets dalam

rangka penawaran saham perusahaan tersebut kepada calon Investor. Data Arus Kas
(Cash flow) Barret untuk 4 tahun yang akan datang sebagai berikut: thn pertama $3 juta;
tahun kedua $6 juta; tahun ketiga $10 juta; dan tahun ke empat $15 juta. Setelah 4 tahun
arus kas (cash flow) akan bertumbuh konstan sebesar 7 persen. Biaya modal (WACC)
Barrets adalah 12 persen, Hutang perusahaan tercatat $60 juta, dan memiliki saham biasa
(common stock) sebesar 10 juta lembar.

e. Berapa nilai arus kas bersih (net present value) selama 4 tahun?
f. Berapa besar nilai Terminal Value?
g. Berapa besar nilai Perusahaan dan harga saham per lembar?

4..Risk and Return Chapt 11 (12 points).

Catatan tingkat pengembalian saham pada empat tahun terakhir sebagai berikut:
 1 2 3 4
-7% +23% +18% +6%
a. Berapa persen rata-rata tingkat pengembalian Saham per tahun?
b. Berapa varian dari pengembalian saham?
c. Berapa standar deviasi dari tingkat pengembaalian saham?

5.Capital sturcture, Chapter 16 (28 points)

PT. Gentry Motor. Sebuah produser mesin generator Turbin, dalam hal ini catatan
EBIT (Earnings before taxes)= $4 juta, pajak perseroan (T)=35%; Hutang
perusahaan $2 juta, beban bunga (kd) sebesar 10%, Biaya equity (ks) adalah 15%.
Saham yg beredar (outstanding) 600,000 lembar saham, nilai buku per lembar
saham = $10. Kondisi pasar stabil, tidak ada pertumbuhan, dan semua laba bersih
dibagikan sebagai dividend
d. Berapa nilai laba bersih per lebar sham (EPS) dan harga saham per lembar
(Po)?
e. Berapa Biaya Modal (WACC) PT. Gentry?
f. Gentry bisa meningkatkan Hutang $8 juta dan menjadi sebesar $10 juta.
Hutang yg baru bisa digunakan untuk membeli sebahagian saham yg beredar
(Outstanding) dengan harga pasar. Beban bunga terhadap Hutang baru
sebesar 12%, biaya modal akan meningkat dari 15% menjadi 17%. EBIT
akan tetap sama. Apakah Gentry akan merubah struktur modalnya?

Soal No 5. Cahpter 16, p-542 (19).

19. Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding
and a stock price of $7.50 per share. Although investors currently expect Kurz to remain
an all-equty firm. Kurz plans to announce that it will borrow $50 million and use the
funds to repurchase shares. Kurz will pay interest only on this debt, and it has no further
plans to increase or decrease the amount of debt. Kurz is subject to a 40% corporate tax.
a. What is the market value of Kurzs existing assets before the announcement?
b. What is the market value of Kurz’s assets (including any tax shields) just after the debt
is issued, but before shares are repurchased.
c. What is Kurz’s share price just before the share repurchased. How many shares will
Kurz repurchase?
d. What are Kurz’s marekt value balance sheet and share price after the share repurchase?

Plan: Calculate answers to the several questions asked in the problem.

Execute:
a. Assets  Equity  $7.50  20  $150 million
b. Assets  150 (existing)  50 (cash)  40%  50 (tax shield)  $220 million
c. E  Assets  Debt  220  50  $170 million.
 $170 million
Share price 
20
 $8.50

Kurz will repurchase
50
 5.882 million shares.
8.50

d. Assets  150 (existing)  40%  50 (tax shield)  $170 million.

Debt  $50 million
E  A  D  170  50  $120 million
$120
Share price   $8.50/share
20  5.882

Evaluate: Several values are calculated with a resulting share price of $8.50.

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g. Gentry can increase its debts by $8 million to a total of $10 million, using the
new debt to buy back retire some of its shares at the current price. Its interest
on debt will be 12 percent, and it cost of equity will rise from 15 percent to 17
percent. EBIT will remain constant Shoud Gentry change its capital
structure?

2. Loan amortization (annuited).

Kiel Bank will give you $10,000 to day in exchange for 4 equal payments.
Interest rate of landing charged you 6 percent. What is the present value of
annuity payment. Formula: P = C x 1/r [( 1 – 1/(1+r)n]
Loan Amortization
1.
2.
3.
4.