1. Greenwave, Inc., went public 5 years ago and has had no further equity issuance (or repurchases of equity). The firm has the following current balances for its book value of equity:
Par Value ($2.00 par value per share) $350,000
Capital in Excess of Par $0
Retained Earnings $7,800,000
a. From this information, can we tell how many shares are outstanding for this firm and the price that these shares were sold to the public? If so, calculate these two items. If not, tell me what additional information you need to know.
b. What is Greenwave's Book Value Per Share?
c. Can the Greenwave's market value per share be calculated using the above information? Explain why or why not.
d. Calculate what the new Book Value Per Share would be if the firm decided to issue another 40,000 shares at $20 per share.
2. Pretend that it is now January 1, 2009. Clamato, Inc. has issued cumulative preferred stock with an annual 10% dividend and a par value of $25 per share. They also have common stock outstanding that has historically paid a $0.06 per share dividend.
a. How many dollars are expected to be paid out as a preferred stock dividend (per share) in 2009?
b. Suppose that next year (2010) that Clamato experiences some cash flow problems and for the first time ever, the company decides not to pay their preferred and common stock dividends. One year later, (2011), the firm wishes to pay a $0.07 per share common stock dividend. How much will the company pay to an investor that holds one share of common stock and one share of preferred stock in 2011?
c. If the investor is a U.S. individual with a large ownership in Clamato, Inc., what percent of the preferred stock dividend will be taxable, according to the U.S. tax code?
d. If the investor is a U.S. corporation with a small ownership in Clamato, what percent of the preferred stock dividend will be taxable, according to the U.S. tax code?
3. Firenze, Inc. is an all-equity firm that has 500,000 shares of stock outstanding. The company has decided to borrow $8 million at 9% interest to repurchase 200,000 shares of outstanding stock.
a. Suppose that Firenze operates without taxation (or financial distress). What is the value of this firm in its current all-equity state. What will the firm's value be after the recapitalization?
b. Under MMI, in a world with no taxes (nor financial distress), would the value of the levered firm above (i.e. Firenze with $8 million of debt after the recapitalization) increase or decrease if only $4 million was borrowed to buy back 100,000 shares of stock? Explain your answer.
4. Ignore taxes and financial distress for this question. Suppose that your firm has a debt-equity ratio of 0.75, a cost of debt of 8.5%, and an unlevered cost of equity of 15%.