Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $\$ 0.75$ out of annual earnings per share of $\$ 2.25$. Currently, Rubenstein Bros.' stock is selling for $\$ 12.50$ per share. Adhering to the company's target capital structure, the firm has $\$ 10$ million in total invested capital, of which $40 \%$ is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of $18 \%$, which is expected to continue this year and into the foreseeable future.

What is the stock's required return?

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 dollars out of annual earnings per share of 2.25 dollars. Currently, Rubenstein Bros.' stock is selling for 12.50 dollars per share. Adhering to the company's target capital structure, the firm has 10 million dollars in total invested capital, of which 40 percent is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18 percent, which is expected to continue this year and into the foreseeable future.

a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: $g=$ Retention rate $\times$ ROE.) b. What is the stock's required return?

c. If the firm changed its dividend policy and paid an annual dividend of 1.50 dollars per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firm's new expected longrun growth rate and required return?

d. Suppose instead that the firm has decided to proceed with its original plan of disbursing 0.75 dollars per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50 dollars. In other words, for every 12.50 dollars in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalization? (Hint: Remember that market capitalization $=\mathrm{P}_0 \times$ number of shares outstanding.)

e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the company's earnings per share be diluted?

The firms HL and LL are identical except for their debt-to-total-assets ratios and interest rates on debt. Each has $20 million in assets, earned $4 million before interest and taxes, and has a 40 percent marginal tax rate. Firm HL, however, has a debt-to-total-assets ratio (D/TA) of 50 percent and pays 12 percent interest on its debt, whereas LL has a 30 percent debt-to-total-assets ratio and pays only 10 percent interest on debt.

Calculate the rate of return on equity (net income/equity) for each firm.

Selected balance sheet and income statement information from Siemens, AG, for 2015 through 2017 follows(Euro in millions).

Compute times interest earned and the debt-to-equity ratio for each year and discuss any trends for each.

When calculating the weighted average cost of capital, the costs of which of the following types of capital include a ($1 - T$) multiplier, where $T$ is the effective tax rate?

a. Debt capital

b. Equity capital

c. Both (a) and (b)

d. Neither (a) nor (b)

The following financial statement data is from five separate companies.

Required
1. Answer the following questions about Company V:
 a. What is the amount of equity on December 31, 2010?
 b. What is the amount of equity on December 31, 2011?
 c. What is the net income or loss for the year 2011?
2. Answer the following questions about Company W:
 a. What is the amount of equity on December 31, 2010?
 b. What is the amount of equity on December 31, 2011?
 c. What is the amount of liabilities on December 31, 2011?
3. Calculate the amount of owner investments for Company X during 2011.
4. Calculate the amount of assets for Company Y on December 31, 2011.
5. Calculate the amount of liabilities for Company Z on December 31, 2010.

The following financial statement information is from five separate companies:

Required

1. Answer the following questions about Company A:$~~~~$a. What is the amount of equity on December 31, 2014?$~~~~$b. What is the amount of equity on December 31, 2015?$~~~~$c. What is the amount of liabilities on December 31, 2015?
2. Answer the following questions about Company B:$~~~~$a. What is the amount of equity on December 31, 2014?$~~~~$b. What is the amount of equity on December 31, 2015?$~~~~$c. What is net income for year 2015?
3. Calculate the amount of assets for Company C on December 31, 2015.
4. Calculate the amount of owner investments for Company D during year 2015.
5. Calculate the amount of liabilities for Company E on December 31, 2014.

When a person borrows money to buy a house, the secured loan the bank issues is a mortgage. The house serves as the security the bank needs to justify the risk of loaning money. If a homeowner takes out another loan on the same house, the secured loan is a second mortgage. Some homeowners use their homes as collateral to get a home equity loan. In 2006, there were $51,234,170$ houses used as collateral for mortgages or home equity.

How many homeowners have only taken a first mortgage?

Stock split versus stock dividend: Firm Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders' equity position shown. The current stock price is $\$ 120$ per share. The most recent period's earnings available for common stock are included in retained earnings.

b. What change in stock price would you expect to result from the stock split?

Based on this information alone, can you determine whether White can pay a $2,000 cash dividend? Why or why not?

The December 31 , 2016, balance sheet for Deen Company showed total stockholders' equity of$156,000. Total stockholders' equity increased by $65,000 between December 31, 2016, and December 31, 2017. During 2017 Deen Company acquired$20,000 cash from the issue of common stock. Deen Company paid a $5,000 cash dividend to the stockholders during 2017.

Required

Determine the amount of net income or loss Deen reported on its 2017 income statement.

The stockholders’ equity section of Leyland Corporation’s balance sheet at December 31 is presented here.

$$\begin{array}{c} \textbf{LEYLAND CORPORATION}\\ \textbf{Balance Sheet (partial)}\\ \end{array}$$

$$\begin{array}{lrr} \text{Stockholders’ equity}\\ \qquad\text{Paid-in capital}\\ \qquad\qquad\text{Preferred stock, cumulative, 10,000 shares authorized,}\\ \qquad\qquad\qquad\text{6,000 shares issued and outstanding}&\text{\$\hspace{7pt}600,000}\\ \qquad\qquad\text{Common stock, no par, 750,000 shares authorized,}\\ \qquad\qquad\qquad\text{580,000 shares issued}&\underline{\text{\hspace{6pt}2,900,000}}\\ \qquad\qquad\qquad\text{Total paid-in capital}&\text{\hspace{1pt}3,500,000}\\ \qquad\text{Retained earnings}&\underline{\text{\hspace{6pt}1,158,000}}\\ \qquad\text{Total paid-in capital and retained earnings}&\text{\hspace{1pt}4,658,000}\\ \qquad\text{Less: Treasury stock (6,000 common shares)}&\underline{\text{\hspace{19pt}32,000}}\\ \text{Total stockholders’ equity}&\underline{\underline{\text{\$\hspace{1pt}4,626,000}}}\\ \end{array}$$

Instructions

From a review of the stockholders’ equity section, answer the following questions.

(b) Assuming there is a stated value, what is the stated value of the common stock?

Stock split versus stock dividend: Firm Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders' equity position shown. The current stock price is $\$ 120$ per share. The most recent period's earnings available for common stock are included in retained earnings.

d. Contrast your answers to parts a through c with the circumstances surrounding a 50% stock dividend.

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 30% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 40%) will be $68 million and that investment expenditures will be$30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity?

On October 1, Little Bobby Corporation’s stockholders’ equity is as follows.

$$\begin{array}{lc} \text{Common stock, \$5 par value}&\$400,000\\ \text{Paid-in capital in excess of par- common stock}&25,000\\ \text{Retained earnings}&\underline{155,000}\\ \text{Total stockholders' equity}&\underline{\underline{\$580,000}} \end{array}$$

On October 1, Little Bobby declares and distributes a 10% stock dividend when the market price of the stock is $15 per share.

Instructions (a) Compute the par value per share (1) before the stock dividend and (2) after the stock dividend.