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Chapter 18

A10 Question: (Dividend adjustment model) Regional Software has made a bundle selling spreadsheet software and has begun paying cash dividends. The firm's chief financial offier would like the firm to distribute 25% of its annual earnings (POR = 0.25) and adjust the dividend rate to changes in earnings per share at the rate ADJ = 0.75. Regional paid $1.00 per share in dividends last year. It will earn at least $8.00 per share this year and each year in the foreseeable future. Use the dividend adjustment model, Equation (18.1), to calculate projected dividends per share for this year and the next four.

B2 Question: (Dividend policy) A firm has 20 million common shares outstanding. It currently pays out $1.50 per share per year in cassh dividends on its common stock. Historically, its payout ration has ranged from 30% to 35%. Over the next five years it expects the earnings and discretionary cash flow show below in millions.

a. Over the five-year period, what is the maximum overall payout ratio the firm could achieve without triggering a securities issue?
b. Recommend a reasonable dividend policy for paying out discretionary cash flor in years 1 through 5

1 2 3 4 5
Earnings 100 125 150 120 140 150+ per year
Discretionary cash flow 50 70 60 20 15 50+ per year

Chapter 20

A2 Question: (Comparing borrowing costs) Stephens Security has two financing alternatives: (1) A publicly placed $50 million bond issue. Issuance costs are $1 million, the bond has a 9% coupon paid semiannually, and the bond has a 20-year life. (2) A $50 million private placement with a large pension fund. Issuance costs are $500,000 the bond has a 9.25% annual coupon, and the bond has a 20-year life. Which alternative has the lower cost (annual percentage yield)?

Chapter 21

C2 Question: (leasing taxes, and the time value of money) THe lessor can claim the tax deductions associated with asset ownership and realize the leased asset's residual value. In return the lessor must pay tax on the rental income.

a. Explain why a financial lease represents a secured loan in which the lenders entire debt service stream istaxable as ordinary income to the lessor/lendor.

b. In view of this tax cost, what tax condition must hold in order for a financial lease transaction to generate positive net-present-value tax benefits for both the lessor and lessee?

c. Suppose the lease payments in Table 21-2 must be made in advance, not arrears. (Assume that the timing of the lease payment tax deductions/obligations changes accordingly but the timing of the depreciation tax deductions does not change). Show that the net advantage to elasing for NACCO must decrease as a result. Explain why this reduction occurs.

d. Show that if NACCO is nontaxable the net advantage to leasing is negative and greater in absolute value than the net advantage of the lease to the lessor.

e. Either find a lease rate that will give the financial lease a positive net advantage for both lessor and lesse, or show that no such lease rate exists.

f. Explain what your answer to aprt e implies about the tax costs and tax benefits of the financial lease when lease payments are made in advance.

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Category: Homework
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