A firm is all equity financed with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000 and it decides to pay a cash dividend of $2000. Calculate the value of each share after the dividend payout.


a. $22.8

b. $20

c. $19.8

d. not enough information


Grandma’s Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000 and 0.40 probability of a bad year with operating cash flow of $30,000.  The company has a debt of $35,000 with 8 percent interest due next year.  Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?


a. Shareholders expected claim is $12,200

b. Creditors expected claim is $37,800

c. Creditors expected claim is $35, 680

d. None of the above


The owners of a firm facing a high probability of bankruptcy prefer to invest in ____ projects, because ____.

a. safer; riskier projects make bankruptcy more likely

b. no new; the firm is likely to go bankrupt anyway

c. risky; the shareholders have little to lose and might win if successful

d. risky; creditors prefer taking a gamble rather than having the company default


You are trying to decide whether to accept or reject a one-year project.  The project is estimated to generate $5,000 in incremental gross profit, which includes $200 in depreciation.  Incremental SG&A expense is $400.  At a 35% tax rate, the after-tax incremental cash flow is:


a. $2,990

b. $3,190

c. $3,250

d. $3,510


What is the present value of a growing perpetuity that makes a paymet of $100 in the first year, which thereafter grows at 3% per year? Apply a discount rate of 7%.


a. 2,000

b. 3,500

c. 2,500

d. 4,000


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