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FIN534 Week 8 Discussion and Homework Set 4

FIN534 Week 8 Discussion

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"Distributions to Shareholders" Please respond to the following:

* * From the e-Activity, contrast the differences between a stock dividend and a stock split. Imagine that you are a stockholder in a company. Determine whether you would prefer to see the company that you researched declare a 100% stock dividend or declare a 2-for-1 split. Provide support for your answer with one (1) real-world example of your preference.

* * From the scenario, examine the dividend rate that TFC is ...view middle of the document...

)

5. What is the crossover rate, and what is its significance?

The staff of Porter Manufacturing has estimated the following net after-tax cash flows and probabilities for

a new manufacturing process:

Line 0 gives the cost of the process, Lines 1 through 5 give operating cash flows, and Line 5* contains the

estimated salvage values. Porter’s cost of capital for an average-risk project is 10%.

Net After-Tax Cash Flows

Year P = 0.2 P = 0.6 P = 0.2

0 −$100,000 −$100,000 −$100,000

1 20,000 30,000 40,000

2 20,000 30,000 40,000

3 20,000 30,000 40,000

4 20,000 30,000 40,000

5 20,000 30,000 40,000

5* 0 20,000 30,000

6. Assume that the project has average risk. Find the project’s expected NPV. (Hint: Use expected

values for the net cash flow in each year.)

7. Find the best-case and worst-case NPVs. What is the probability of occurrence of the worst case

if the cash flows are perfectly dependent (perfectly positively correlated) over time?

8. Assume that all the cash flows are perfectly positively correlated. That is, assume there are only

three possible cash flow streams over time—the worst case, the most likely (or base) case, and

the best case—with respective probabilities of 0.2, 0.6, and 0.2. These cases are represented by

each of...

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