As a financial analyst of Bain Capital LLP, you are evaluating two stocks in your firm’s...

90.2K

Verified Solution

Question

Finance

As a financial analyst of Bain Capital LLP, you are evaluatingtwo stocks in your firm’s portfolio: HPC Corporation Ltd (HPC)Currently, HPC is valued at $12 million. It does not have any debtand its cost of equity is 14%. The Board decided to borrow $3million and use the proceeds to repurchase shares. HPC is able toborrow from its bankers at a rate of 6% per year. SimplyPost Ltd(SP) SP was selling at $6 per share when there were 800,000 sharesoutstanding and earnings was $1.8 million. Recently, it declared athree-for-two stock split where three new shares are issued to theshareholder for every 2 shares that they held. Thereafter, anAnnual General Meeting was held to declare and approve the paymentof dividends based on a payout of 80% of earnings. Assume no marketimperfections or tax effects.
(a) Calculate HPC’s value and cost of equity immediately afterthe capital restructuring under the two scenarios, namely (i) nocorporate tax and (ii)corporate tax is 17%.
(b) Interpret and explain your answer in part (a).
(c) Determine SP’s share price after the stock split anddividend per share.
(d) Describe and discuss factors that affect SP’s dividendpolicy.

Answer & Explanation Solved by verified expert

4.0 Ratings (433 Votes)

a HPCs Valueand Cost of Equity i No corporate Tax ii Corporate Tax is1700b Interpretation As the shares are repurchased withdebt See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

As a financial analyst of Bain Capital LLP, you are evaluatingtwo stocks in your firm’s portfolio: HPC Corporation Ltd (HPC)Currently, HPC is valued at $12 million. It does not have any debtand its cost of equity is 14%. The Board decided to borrow $3million and use the proceeds to repurchase shares. HPC is able toborrow from its bankers at a rate of 6% per year. SimplyPost Ltd(SP) SP was selling at $6 per share when there were 800,000 sharesoutstanding and earnings was $1.8 million. Recently, it declared athree-for-two stock split where three new shares are issued to theshareholder for every 2 shares that they held. Thereafter, anAnnual General Meeting was held to declare and approve the paymentof dividends based on a payout of 80% of earnings. Assume no marketimperfections or tax effects.(a) Calculate HPC’s value and cost of equity immediately afterthe capital restructuring under the two scenarios, namely (i) nocorporate tax and (ii)corporate tax is 17%.(b) Interpret and explain your answer in part (a).(c) Determine SP’s share price after the stock split anddividend per share.(d) Describe and discuss factors that affect SP’s dividendpolicy.