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MM Proposition I:
• MM Proposition II (No Taxes)
• Leverage increases the risk and return to stockholders
B).A 3:2 stock split means for every two shares currently held, the investor
receives a third share.
• Share price = $20 × 2/3 = $20/ 1.50 = $13.33 per share.
C). A 1:3 reverse split implies that every three shares will turn into one share.
Therefore, the stock price will rise to:
• Share price = $20 × 3 / 1 = $60 per share.
2. Flychucker corporation is evaluating an extra dividend versus share
repurchase. In either case $6,300 would be spent. Current earnings are
$2.60 per share and the stock currently sells for $51 per share. There are
1,500 shares outstanding. Ignore taxes and other imperfections in
answering parts the following:
a. Evaluate two alternatives in terms of the effect on the price per share
of the stock and shareholder wealth.
Raising capital
• Left Turn, Inc., has 120,000 shares of stock outstanding. Each share is worth
$94, so the company’s market value of equity is $11,280,000. Suppose the
firm issues 25,000 new shares at the following prices: $94, $90, and $85.
What will the effect be of each of these alternative offering prices on the
existing price per share?
Raising capital
• Meera owns 300 shares of ABC corporation and the
shares are trading at $20 each. The company announces
a rights issue in the ratio of 1 for 5. The subscription price
for the rights issue is $12. Calculate the following
• Value of portfolio before rights issue
• Value of portfolio after rights issue
• Price per share post issue
Leasing
The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be
collected in the month of the sale, and the remaining 60 percent will be collected in the following month. Credit
purchases will be paid in the month following the purchase. In March 2016, credit sales were $332,640, and credit
purchases were $247,100. Using this information, complete the following cash budget: