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Corporate Finance: sample exam questions...

I am preparing for my FINAL examination(s)...I would like to have these problems solved - so that I can use them for study references in answering like problems.
Thank you.

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1. Global Utilities Company (GUC) follows a policy of paying out 60 percent of its net income as cash dividends to its shareholders each year. The company plans to do so again this year, during which GUC earned $50 million in net profits after tax. If the company has 25 million shares outstanding and pays dividends quarterly, what is the company's normal dividend payment per share each quarter?

2. A publicly traded firm announces a decrease in its dividend with no other material information accompanying the announcement. What inside information is this announcement likely to convey, and what is the expected stock-price impact due to the market's assimilation of this information?

3. Assume that two unlevered firms operate in the same industry, have identical assets worth $50 million that yield a net profit of 15 percent per year, and have 2 million shares outstanding. Further assume that each firm has the opportunity to invest an amount equal to its net income each year in (slightly) positive- NPV investment projects. The Alpha Company wishes to finance its capital spending through retained earnings. The Omega Company wishes to pay out 100 percent of its annual earnings as cash dividends and to finance its investments with a new share offering each year. There are no taxes or transactions costs to issuing securities.

a. Calculate the overall and per-share market value of the Alpha Company at the end of each of the next three years. What return on investment will this firm's shareholders earn?

b. Describe the specific steps that the Omega Company must take today (end-of-year 0) and at the end of each of the next three years if it is to both pay out all of its net income as dividends and still grow its assets at the same rate as that of the Alpha Company.

c. Calculate the number and per-share price of shares that the Omega Company must sell today and at the end of each of the next three years if it is to both pay out al of its net income as dividends and still grow its assets at the same rate as that of the Alpha Company.

d. Assuming that you currently own 20,000 shares (1 percent) of Omega Company stock, compute the fraction of the company's total outstanding equity that you will own three years from now if you do not participate in any of the share offerings the firm will make during this holding period.

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Solution Preview

1. Global Utilities Company (GUC) follows a policy of paying out 60 percent of its net income as cash dividends to its shareholders each year. The company plans to do so again this year, during which GUC earned $50 million in net profits after tax. If the company has 25 million shares outstanding and pays dividends quarterly, what is the company's normal dividend payment per share each quarter?

Net profits = $50 million
Cash dividends = 60%*Net profits = $30 million
No of shares = $25 million
Annual Dividend per share = $30 million / $25 million = $1.2 million
Quarterly dividend = $1.2/4 = $0.30 per share

2. A publicly traded firm announces a decrease in its dividend with no other material information accompanying the announcement. What inside information is this announcement likely to convey, and what is the expected stock-price impact due to the market's assimilation of this information?

If there is no other information then investors will feel that the net earnings of the business have decreased and therefore the dividends.
As earnings have gone down, the valuation of the firm will decrease, thus the stock of the firm will go down.

3. Assume that two unlevered firms operate in the same industry, have identical assets worth $50 million that yield a net profit of 15 percent per year, and have 2 million shares outstanding. Further assume that each firm has the opportunity to invest an amount equal to its net income each year in (slightly) positive- NPV investment projects. The Alpha Company wishes to finance its capital ...

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