1. Problem 19-4 Stock Splits and Stock Dividends Roll Corporation (RC) currently has 330,000 shares of stock outstanding that sell for $64 per share. Assuming no market imperfections or tax effects exist, what will the share price be after: a. RC has a five-for-three stock split?

1. Problem 19-4 Stock Splits and Stock Dividends
Roll Corporation (RC) currently has 330,000 shares of stock outstanding that sell for $64 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:

a. RC has a five-for-three stock split? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

New share price $

b. RC has a 15 percent stock dividend? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

New share price $

c. RC has a 42.5 percent stock dividend? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

New share price $

d. RC has a four-for-seven reverse stock split? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

New share price $

e. Determine the new number of shares outstanding in parts (a) through (d). (Do not round intermediate calculations and round your answers to the nearest whole number. (e.g., 32))

a. New shares outstanding

b. New shares outstanding

c. New shares outstanding

d. New shares outstanding

2. Problem 19-16 Dividend Smoothing
The Sharpe Co. just paid a dividend of $1.80 per share of stock. Its target payout ratio is 40 percent. The company expects to have an earnings per share of $4.95 one year from now.

a. If the adjustment rate is .3 as defined in the Lintner model, what is the dividend one year from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Dividend $

b. If the adjustment rate is .6 instead, what is the dividend one year from now? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Dividend $

c. Which adjustment rate is more conservative?

.6

.3

3. Problem 29-16 Mergers and Shareholder Value
Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here:

State Probability Bentley Rolls
Boom .70 $ 290,000 $ 260,000
Recession .30 $ 110,000 $ 80,000
________________________________________

Bentley currently has a bond issue outstanding with a face value of $125,000. Rolls is an all-equity company.

a. What is the value of each company before the merger? (Do not round intermediate calculations.)

Value of Bentley $

Value of Rolls $

________________________________________

b. What are the values of each company’s debt and equity before the merger? (Leave no cells blank – be certain to enter “0” wherever required. Do not round intermediate calculations.)

Equity of Rolls $

Debt of Rolls

Equity of Bentley $

Debt of Bentley $

________________________________________

c. If the companies continue to operate separately, what are the total value of the companies, the total value of the equity, and the total value of the debt? (Do not round intermediate calculations.)

Value of companies $

Value of equity $

Value of debt $

________________________________________

d.1 What would be the value of the merged company? (Do not round intermediate calculations.)

Merged company value $

d.2 What would be the value of the merged company’s debt and equity? (Do not round intermediate calculations.)

Value of the company
Value of debt $

Value of equity $

________________________________________

e-1. How much would shareholders gain or lose in the merger? (Do not round intermediate calculations. Enter a gain as a positive number and a loss as a negative number.)

Shareholders’ gain or loss $

e-2. How much would bondholders gain or lose in the merger? (Do not round intermediate calculations. Enter a gain as a positive number and a loss as a negative number.)

Bondholders’ gain or loss $

4. Problem 29-8 EPS, PE, and Mergers
The shareholders of Flannery Company have voted in favor of a buyout offer from Stultz Corporation. Information about each firm is given here:

Flannery Stultz
Price–earnings ratio 6.35 12.70
Shares outstanding 73,000 146,000
Earnings $ 230,000 $ 690,000
________________________________________

Flannery’s shareholders will receive one share of Stultz stock for every three shares they hold in Flannery.

a-1 What will the EPS of Stultz be after the merger? (Do not round intermediate calculations and round your final answer to 3 decimal places. (e.g., 32.16))

EPS $

a-2 What will the PE ratio be if the NPV of the acquisition is zero? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

PE

b. What must Stultz feel is the value of the synergy between these two firms? (Do not round intermediate calculations.)

Synergy value $

5. Problem 19-20 Dividends versus Reinvestment
After completing its capital spending for the year, Carlson Manufacturing has $1,000 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 8 percent or paying the cash out to investors who would invest in the bonds themselves.

a. If the corporate tax rate is 35 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money? (Do not round intermediate calculations.)

Personal tax rate
%

b. Is the answer to (a) reasonable?

Yes

No

c. Suppose the only investment choice is a preferred stock that yields 12 percent. The corporate dividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferent to the outcome of Carlson’s dividend decision? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Personal tax rate
%

d. Is this a compelling argument for a low dividend payout ratio?

Yes

No