Determine the appropriate answer to stock
Course:- Finance Basics
Reference No.:- EM1349695

Assignment Help
Assignment Help >> Finance Basics

The fund you represent is a significant shareholder in Iron Man Industries which just paid a dividend of $5.25 per share is currently expected to grow in perpetuity at 5% each year. Management has proposed a significant re-structuring of the business which will cost a lot of capital, only part of which can be raised externally. They are proposing that the board of directors suspend dividend payments for 2 years to finance the re-organization after which (in year 3), dividends of $5.00 per share will be re-instated. The re-organization will also cost the firm $100 million in the first year, and $80 million in year 2. This re-organization however will enable dividends to grow at 7% a year from that point forward in perpetuity.

1. If the appropriate discount rate is 11% under either alternative and the firm has 40,000,000 shares outstanding, should you vote to support the re-organization or not?

2. Assume now that inflation is 1% higher and that the discount rate rises appropriately. How do you feel about the re-organization now?


Put your comment

Ask Question & Get Answers from Experts
Browse some more (Finance Basics) Materials
In Section 4.6, we proposed a graph-oriented method for determining the set of strings that could be popped from the stack in a reduce move of an operator-precedence parser.
Develop a four- to five-page paper in which you analyze the Public Budget Cycle in a government agency of your choice. Be sure to include each of the phases of the budget cy
If the lender knows he will receive only $9.9 million in payment after 14 years, how might he be compensated for the loss in purchasing power? A decriptive answer is accepta
Consider a $75,000, 30-year, fixed-rate mortgage with 7.75 percent interest and monthly payments. The lender requires that the borrower pay two points to originate the loan.
Fielding has no short term borrowing as of March 1st, 2008. Assume that the interest rate on short term borrowing is 1% per month. What was Fielding's projected loss for Mar
The topic of many economists today is inflation. However, there is an opposite effect called deflation. Identify the inflation rate of three countries. Also, identify a coun
Find out percentage of the firm's asset does the firm finance using debt (liabilities)? The fraction of the firm's assets that the firm finances using debt is
You have a chance to buy an annuity that pays $950 at the end of each year for 6 years. You could earn 6% on your money in other investments with equal risk. What is the mos