# Finance Question: Help!

Finance Question: Help!

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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