Williams Glassware has estimated, at various debt ratios, the expected earnings per share

P12-21 (EPS and Optimal Debt Ratio) Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.

Debt ratio Earnings per share (EPS) Standard deviation of EPS
0% $2.30 $1.15
20 3.00 1.80
40 3.50 2.80
60 3.95 3.95
80 3.80 5.53

a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.


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The common stock of Warner Inc. is currently selling at $110 per share

E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding.

Instructions
Prepare the necessary journal entries assuming the following.
(a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
(c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Click here for the solution: The common stock of Warner Inc. is currently selling at $110 per share

(Nonconstant Growth Valuation) A company currently pays a dividend of $2 per share (D0 = $2)

(Nonconstant Growth Valuation)  A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

Click here for the solution: (Nonconstant Growth Valuation) A company currently pays a dividend of $2 per share (D0 = $2)

St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share

St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share. After issuance costs, St. Joe netted $57 per share. The company has a marginal tax rate of 40 percent.

a. Calculate the after-tax cost of this preferred stock offering assuming that this stock is a perpetuity.
b. if the stock is callable in 5 years at $66 per share and investors expect it to be called at that time, what is the after-tax cost of this preferred stock offering? (Compute to the nearest whole percent.)

Click here for the solution: St. Joe Trucking has sold an issue of $6 cumulative preferred stock to the public at a price of $60 per share