Corporate Finance Hooke Corp Finance
HW Week 5 (Hooke Corp Fin) 2017Name: Rui XiSection/Cohort:BARM X2Today, November 2018. Facebook is a publicly- listed, hi-tech social-media company that does not pay a cash dividend. Facebook has a good growth record, and the stock has a $175 per share price. Suppose, in December 2018, Facebook announces that it will begin to pay a $1.50 per share quarterly cash dividend (i.e., $6 per year) in March 2018. The prospective 3.4% yield is above-average for US stocks.Management states that Facebook intends to increase the dividend on a regular basis. Suggest three (3) possible reasons for why Facebook management changed the dividend policy. More dividend than before indicates lower WACC. Lower WACC means Facebook has less risk and is worth to invest. Facebook is growing and confident that it will grow in the future. Facebook would like to lower WACC by decreasing cash flow in order to show a higher firm value. JTI Corp. is a successful company, and it has substantial ‘excess cash.’ At this time, management wants to alter JTI’s weighted- average- cost-of- capital (WACC) and its expected return on equity. JTI decides to pay a $300 million cash dividend to shareholders. This action will increase “net debt.”
Using the table below, and the formulas you have seen in class, what will be the company’s new WACC and its new return on equity, after the cash dividend?At present, the expected equity return is 11% before the dividend and the pretax debt cost is 5%.After the dividend, the equity return is 13%, and the debt rate is 6.5%. The tax rate is 40%. JTI, MillionsBeforeAdjustmentsAfterCash300(300)Total Debt600600Net Debt300300600Equity Market Value500(-300)200WACC(pre tax)=(500/800)*11%+(300/800)*5%=8.75%