skittlesarebae6035
30.11.2021 •
Business
Iron Corporation is evaluating an extra dividend versus a share repurchase. In either case, $10,000 would be spent. Current earnings are $1.90 per share, and the stock currently sells for $50 per share. There are 4,000 shares outstanding. Ignore taxes and other imperfections. a. Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth per share. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What will the company's EPS and PE ratio be under the two different scenarios
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Ответ:
The bank would be willing to lend the business owner $179,233.04.
Explanation:
To determine this, the formula for calculating the present value (PV) of an ordinary annuity as follows:
PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (1)
The equation (1) is then applied to the two payment plans as follows:
(a) For a repayment of $2,800 per month for the next three years
PV today = Present value of 3 years payments today = ?
P = monthly payment = $2,800
r = monthly rate = 9.50% ÷ 12 = 0.791667%, or 0.00791667
n = number of months = 3 years * 12 months = 36
Substitute the values into equation (1), we have:
PV today = $2,800 × [{1 - [1 ÷ (1 + 0.00791667)]^36} ÷ 0.00791667]
PV today = $2,800 × 31.2178556171763
PV today = $87,410.00
(b) For a repayment of $5,600 per month for two years after that
PV in 3 years = Present value of 2 years payments in 3 years time = ?
P = monthly payment = $5,600
r = monthly rate = 9.50% ÷ 12 = 0.791667%, or 0.00791667
n = number of months = 2 years * 12 months = 24
Substitute the values into equation (1), we have:
PV in 3 years = $5,600 × [{1 - [1 ÷ (1 + 0.00791667)]^24} ÷ 0.00791667]
PV in 3 years = $5,600 × 21.7796154308224
PV in 3 years = $121,965.846412606
Note that this PV in 3 years we obtained is the present value of 2 years payments in 3 years time. Therefore, we need to convert it to the present value to as follows:
PV of PV in 3 years today = PV in 3 years ÷ (1 + r)^n (2)
Where;
PV in 3 years = $121,965.846412606
r = monthly rate = 9.50% ÷ 12 = 0.791667%, or 0.00791667
n = number of months = 3 years * 12 months = 36
Substitute the values into equation (2), we have:
PV of PV in 3 years today = $121,965.846412606 ÷ (1 + 0.00791667)^36
PV of PV in 3 years today = $121,965.846412606 ÷ 1.32827059801615
PV of PV in 3 years today = $91,823.04
(c) The amount the bank would be willing to lend the business owner
Amount the bank would lend = PV today + PV of PV in 3 years today
Since,
From part (a) above, PV today = $87,410.00
From part (b) above, PV of PV in 3 years today = $91,823.04
Therefore, we have:
Amount the bank would lend = $87,410.00 + $91,823.04 = $179,233.04
Therefore, the bank would be willing to lend the business owner $179,233.04.
Alternative Method:
Note that the amount of $179,233.04 the bank would be willing to lend the business owner can also be easily calculated in an excel sheet. Find attached the excel file to see how it is done.