FIN 401 Chapter 16: FIN401 - Chapter 16 Textbook Notes (Part 1)

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greensheep522

13 Feb 2017

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Fin401 chapter 16 textbook notes (part 1) To begin, suppose the market value of the j. j. sprint company is ,000. The company currently has no debt, and j. j. sprint"s 100 shares sell for each. Further suppose that j. j. sprint restructures itself by borrowing and then paying out the proceeds to shareholders as an extra dividend of (cid:1004)(cid:1004) (cid:1005)(cid:1004)(cid:1004) = pe(cid:396) sha(cid:396)e. This restructuring changes the capital structure of the firm with no direct effect on the firm"s assets. The immediate effect is to increase debt and decrease equity. Table 16. 1 illustrates three possible outcomes in addition to the original no-debt case. Since our goal is to benefit the shareholders, we next examine, in table 16. 2, the net payoffs to the shareholders in these scenarios. For now we ignore the impact of taxes on dividends, capital gains, and losses.

Related Questions

Nico Trading Company must choose its optimal capital structure. Currently, the firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share. Dividends are expected to remain at this level indefinitely. Stock- holders currently require a 12.1 percent return on their investment. Nico is consider- ing changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 30 percent, it will increase its expected dividend to $5.82 per share. Again, dividends are expected to remain at this new level indefi- nitely. However, because of the added risk, the required return demanded by stock holders will increase to 12.6 percent. Based on this information, should Nico make the change? a. Yes b. No c. Itâs irrelevant d. Not enough information

tanserval138

15) Nico Trading Company must choose its optimal capital structure. Currently, the firm has a 20 percent debt ratio and the firm expects to generate a dividend next year of $5.44 per share. Dividends are expected to remain at this level indefinitely. Stock- holders currently require a 12.1 percent return on their investment. Nico is consider- ing changing its capital structure if it would benefit shareholders. The firm estimates that if it increases the debt ratio to 30 percent, it will increase its expected dividend to $5.82 per share. Again, dividends are expected to remain at this new level indefi- nitely. However, because of the added risk, the required return demanded by stock holders will increase to 12.6 percent. Based on this information, should Nico make the change? a. Yes b. No c. Itâs irrelevant d. Not enough information

****Note**** The answer is not (d. Not enough information)