Problem 19-20 Dividends versus Reinvestment After completing its capital spending for the year, Carlson Manufacturing

Problem 19-20, Problem 29-18 , Problem 29-12Problem 19-20 Dividends versus ReinvestmentAfter completing its capital spending for the year, Carlson Manufacturing has $2,700 extra cash.Carlson’s managers must choose between investing the cash in Treasury bonds that yield 6 percent orpaying the cash out to investors who would invest in the bonds themselves.a. If the corporate tax rate is 39 percent, what personal tax rate would make the investors equally willingto receive the dividend or to let Carlson invest the money? (Do not round intermediatecalculations.)Personal tax rate39%b. Is the answer to (a) reasonable?YesNoc. Suppose the only investment choice is a preferred stock that yields 13 percent. The corporatedividend exclusion of 70 percent applies. What personal tax rate will make the stockholders indifferentto the outcome of Carlson’s dividend decision? (Do not round intermediate calculations and roundyour final answer to 2 decimal places. (e.g., 32.16))Personal tax rate%d. Is this a compelling argument for a low dividend payout ratio?YesNoProblem 29-18 Mergers and Shareholder ValueThe Chocolate Ice Cream Company and the Vanilla Ice Cream Company have agreed to merge and formFudge Swirl Consolidated. Both companies are exactly alike except that they are located in differenttowns. The end-of-period value of each firm is determined by the weather, as shown below. There will beno synergy to the merger.StateRainyWarmHotProbability Value.1$ 320,000.4500,000.5980,000The weather conditions in each town are independent of those in the other. Furthermore, each companyhas an outstanding debt claim of $500,000. Assume that no premiums are paid in the merger.a. What are the possible values of the combined company? (Do not round intermediate calculations.)Possible statesRain-RainJoint Value$Rain-WarmRain-HotWarm-WarmWarm-HotHot-Hotb. What are the possible values of end-of-period debt values and stock values after the merger? (Leaveno cells blank – be certain to enter "0" wherever required. Do not round intermediatecalculations.)Rain-RainRain-WarmRain-HotWarm-WarmWarm-HotHot-HotDebt Value$Stock Value$c. How much do stockholders and bondholders each gain or lose if the merger isundertaken? (Negative amount should be indicated by a minus sign. Do not round intermediatecalculations )Bondholder gain/lossStockholder gain/lossProblem 29-12 Effects of a Stock ExchangeConsider the following premerger information about Firm A and Firm B:Total earningsShares outstandingPrice per shareFirm A$ 1,500900$33Firm B$ 1,100250$37Assume that Firm A acquires Firm B via an exchange of stock at a price of $39 for each share of B’sstock. Both A and B have no debt outstanding.a. What will the earnings per share, EPS, of Firm A be after the merger? (Do not round intermediatecalculations and round your final answer to 2 decimal places. (e.g., 32.16))$EPSb. What will Firm A’s price per share be after the merger if the market incorrectly analyzes this reportedearnings growth (that is, the price–earnings ratio does not change)? (Do not round intermediatecalculations and round your final answer to 2 decimal places. (e.g., 32.16))Price per share$c. What will the price–earnings ratio of the postmerger firm be if the market correctly analyzes thetransaction? (Do not round intermediate calculations and round your final answer to 2 decimalplaces. (e.g., 32.16))timesPrice-earningsd-1. If there are no synergy gains, what will the share price of A be after the merger? (Do not roundintermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))Price per share$d-2. What will the price–earnings ratio be? (Do not round intermediate calculations and round yourfinal answer to 2 decimal places. (e.g., 32.16))Price-earningstimesd-3. What does your answer for the share price tell you about the amount A bid for B? Was it too high?too low?Too highToo low

 

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