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Cash dividends are demonstrated

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1. Salvage Value.

Your firm purchased machinery with a 7-year MACRS life for \$10 million. The project, however, will end after 5 years. If the equipment can be sold for \$4.5 million at the completion of the project, and your firm's tax rate is 35 percent, what is the after-tax cash flow from the sale of the machinery?

2. Cash Dividends. The stock of Payout Corp. will go ex-dividend tomorrow. The dividend will be \$0.50 per share, and there are 20,000 shares of stock outstanding. The market-value balance sheet for Payout is shown on the following table.

Assets Liabilities and Equity
Cash \$100,000 Equity \$1,000,000
Fixed assets 900,000

a. What price is Payout stock selling for today?

b. What price will it sell for tomorrow? Ignore taxes.

Solution Preview

Cash Dividends
1. Salvage Value. Your firm purchased machinery with a 7-year MACRS life for \$10 million. The project, however, will end after 5 years. If the equipment can be sold for \$4.5 million at the completion of the project, and your firm's tax rate is 35 percent, what is the after-tax cash flow from the sale of the machinery?

MACRS Table ...

Solution Summary

This solution is comprised of a detailed explanation to answer what price is Payout stock selling for today and what price will it sell for tomorrow.

\$2.19

Merger Gains and Costs are demonstrated.

Merger Gains and Costs. As treasurer of Leisure Products, Inc., you are investigating the possible
acquisition of Plastitoys. You have the following basic data:

Leisure Products Plastitoys
Forecast earnings per share \$5 \$1.50
Forecast dividend per share \$3 \$0.80
Number of shares \$1,000,000 \$600,000
Stock price \$90 \$20

You estimate that investors currently expect a steady growth of about 6 percent in Plastitoys's earnings and dividends. You believe that Leisure Products could increase Plastitoys's growth rate to 8 percent per year, without any additional capital investment required.

a.What is the gain from the acquisition?

b. What is the cost of the acquisition if Leisure Products pays \$25 in cash for each share of Plastitoys?

c. What is the cost of the acquisition if Leisure Products offers one share of Leisure Products for every three shares of Plastitoys?

d. How would the cost of the cash offer and the share offer alter if the expected growth rate of Plastitoys were not increased by the merger?

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