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RoseWind [281]
3 years ago
11

JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand

its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:
Business
1 answer:
Zielflug [23.3K]3 years ago
4 0

Answer:

P0 = $25

Explanation:

To calculate the value of JRN after the announcement, we will use the constant growth model of DDM as the dividends are expected to grow at a constant rate. The formula for price under this model is,

P0 = D0 * (1+g)  /  (r - g)

Where,

  • D0 is the dividend today
  • r is the required rate of return
  • g is the growth rate in dividends

As the risk will remain the same, so we can say that the r or required rate of return will remain the same. To calculate r, we will input the pre announcement values in the formula above.

25 = 2.5 / (r - 0.04)

25 * (r - 0.04)  =  2.5

25r  -  1  = 2.5

25r = 2.5 + 1

r = 3.5 / 25

r = 0.14 or 14%

Using the same formula for post announcement values, we calculate teh price to be,

P0 = 1.5 /  (0.14 - 0.08)

P0 = $25

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A) Joint Venture

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The compensation companies receive for purchasing capital assets is called the return on?
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3 0
1 year ago
Following are the transactions of a new company called Pose-for-Pics. Aug. 1 Madison Harris, the owner, invested $12,750 cash an
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Answer:

Aug 1

Dr Cash $12,750

Dr Photography equipment $54,825

Cr Common stock $67,575

Aug 2

Dr Prepaid insurance $3,500

Cr Cash $3,500

Aug 5

Dr Office supplies $2,423

Cr Cash $2,423

Aug 20

Dr Cash $2,050

Cr Photography fees earned $2,050

Aug 31

Dr Utilities Expense $868

Cr Cash $868

Explanation:

Preparation of general journal entries for the above transactions

Aug 1

Dr Cash $12,750

Dr Photography equipment $54,825

Cr Common stock $67,575

($12,750+$54,825)

Aug 2

Dr Prepaid insurance $3,500

Cr Cash $3,500

Aug 5

Dr Office supplies $2,423

Cr Cash $2,423

Aug 20

Dr Cash $2,050

Cr Photography fees earned $2,050

Aug 31

Dr Utilities Expense $868

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3 0
2 years ago
Creative Sound Systems sold investments, land, and its own common stock for $32.0 million, $14.8 million, and $39.6 million, res
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Answer:

Creative Sound Systems should report $18,800,000 as net cash flows from financing activities

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Cash flow Financing activities are the funds that the business acquire or paid to finance its main activities, these involve borrowing and repaying short-term loans, long-term loans and other long-term liabilities.

From the question, Cash inflow from Issue of common share and Cash outflow from purchase of treasury stock are the only recognizable Financing activities

Particulars                                                                Amount

Cash inflow from Issue of common share              $39,600,000

Cash outflow from purchase of treasury stock     -$20,800,000

Net cash flows from financing activities              $18,800,000

7 0
3 years ago
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