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Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share.
a. If Host does a 3:2 stock split, what will its new share price be?
b. If Host does a 1:3 reverse split, what will its new share price be?
Given the earnings per share over the period 2016 – 2021 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a and b.
a) Pay a $1.60 dividend per share and increase to $1.90 per share whenever earnings per share rise above $2.9 per share for two consecutive years. After that, the new earnings plateau is to further increase the dividend per share to $2.3 whenever earnings per share rise above $4.2 for two consecutive years.
b) Pay $1.60 per share except when earnings exceed $3.20 per share, in which case pay an extra dividend of 60% of earnings above $3.20 per share.
The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?
Canadian-based mining company Canada Gold (CG) suspended its dividend in March 2016 as a result of declining gold prices and delays in obtaining permits for its mines in Greece. Suppose you expect CG to resume paying annual dividends in two years’ time, with a dividend of $2.25 per share, growing by 5% per year. If CG’s equity cost of capital is 10%, what is the value of a share of CG today?
Procter and Gamble (PG) Company has just paid an annual dividend of $2.50. Analysts are predicting dividends to grow by 8% per year over the next three years. After then, PG’s earnings are expected to grow 3% per year, and its dividend payout rate will remain constant. If PG’s equity cost of capital is 8.5% per year, what price does the dividend discount model predict PG stock should sell for today?
What is the cost of capital? What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?
Do the net present value (NPV) and internal rate of return (IRR) always agree with respect to accepting–reject decisions? With respect to ranking decisions? Explain.
Robin Millar has the opportunity to invest in project A which costs $18,000 today and promises to pay annual end-of-year payments of $4,400, $5,000, $5,000, $4,000, and $3,600 over the next 5 years. Determine the payback period for project A.
International Business Machine is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collection period is expected to increase from 45 to 60 days, and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm.
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