Accounting

[QUESTION] Dividends are currently taxed twice. The corporation must pay taxes on its earnings, and then shareholders must pay taxes on the dividends paid. What would be the effect on corporate financing if this double taxation were eliminated by permitting companies to deduct dividend payments as an expense?

[QUESTION] Why might capital structure changes speak louder than words if management believed its stock were undervalued? What is the likely direction of the financial signal?

[QUESTION] [Problem 17.1] The Lex I. Cographer Dictionary Company has net operating income of $10 million and $20 million of debt with a 7 percent interest rate. The earnings of the company are not expected to grow, and all earnings are paid out to shareholders in the form of dividends. In all cases, assume no taxes. a. b. Next, assume that the firm issues an additional $10 million in debt and uses the proceeds to retire common stock. Also, assume that the interest rate and overall capitalizati...

[QUESTION] [Problem 17.2] The Wannabee Company and the Gottahave Company are identical in every respect except that the Wannabee Company is not financially levered, whereas the Gottahave Company has $2 million in 12 percent bonds outstanding. There are no taxes, and capital markets are assumed to be perfect. The earnings of both companies are not expected to grow, and all earnings are paid out to shareholders in the form of dividends. The valuation of the two firms is shown as follows: a. You ...

[QUESTION] [Problem 17.3] The T. Boom Pickens Corporation has a $1 million capital structure and always maintains this book value amount. Pickens currently earns $250,000 per year before taxes of 50 percent, has an all-equity capital structure of 100,000 shares, and pays out all earnings in dividends. The company is considering issuing debt in order to retire common stock. The cost of the debt and the resulting price per share of the common stock at various levels of debt are given in the follow...

[QUESTION] [Problem 17.4] Gioanni Chantel Truffles, Inc., has $1 million in earnings before interest and taxes. Currently it is all-equity-financed. It may issue $3 million in perpetual debt at 15 percent interest in order to repurchase stock, thereby recapitalizing the corporation. There are no personal taxes. a. If the corporate tax rate is 40 percent, what is the income available to all security holders if the company remains all-equity-financed? If it is recapitalized? b. What is the present...

[QUESTION] [Problem 17.5] Stinton Vintage Wine Company is currently family owned and has no debt. The Stinton family is considering going public by selling some of their stock in the company. Investment bankers tell them the total market value of the company is $10 million if no debt is employed. In addition to selling stock, the family wishes to consider issuing debt that, for computational purposes, would be perpetual. The debt would then be used to purchase and retire common stock, so that th...

[QUESTION] [Problem 17.6] Rebecca Isbell Optical Corporation is trying to determine an appropriate capital structure. It knows that, as its financial leverage increases, its cost of borrowing will eventually increase as will the required rate of return on its common stock. The company has made the following estimates for various financial leverage ratios. a. At a tax rate of 50 percent, what is the weighted average cost of capital of the company at various leverage ratios in the absence of ban...

[QUESTION] [Problem 17.7] Art Wyatt Pool Company wishes to finance a $15 million expansion program and is trying to decide between debt and external equity. Management believes that the market does not appreciate the company’s profit potential and that the common stock is undervalued. What type of security (debt or common stock) do you suppose that the company will issue to provide financing, and what will be the market’s reaction? What type of security do you think would be issued if manage...

[QUESTION] Explain what is meant by the time value of money. Why is a bird in the hand worth two (or so) in the bush? Which capital budgeting approach ignores this concept? Is it optimal?