D2FIN100: Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share. If Host does a 3:2 stock split: Introduction to Finance Assignment, HU, Malaysia

Question 1

• Suppose the stock of Host Hotels & Resorts is currently trading for $20 per share.
  a. If Host does a 3:2 stock split, what will its new share price be?
  b. If Host does a 1:3 reverse split, what will its new share price be?
• Given the earnings per share over the period 2016 – 2021 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a and b.

a) Pay a $1.60 dividend per share and increase to $1.90 per share whenever earnings per share rise above $2.9 per share for two consecutive years. After that, the new earnings plateau is to further increase the dividend per share to $2.3 whenever earnings per share rise above $4.2 for two consecutive years.
b) Pay $1.60 per share except when earnings exceed $3.20 per share, in which case pay an extra dividend of 60% of earnings above $3.20 per share.

• The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom?

Question 2

• Canadian-based mining company Canada Gold (CG) suspended its dividend in March 2016 as a result of declining gold prices and delays in obtaining permits for its mines in Greece. Suppose you expect CG to resume paying annual dividends in two years’ time, with a dividend of $2.25 per share, growing by 5% per year. If CG’s equity cost of capital is 10%, what is the value of a share of CG today?
•  Procter and Gamble (PG) Company has just paid an annual dividend of $2.50. Analysts are predicting dividends to grow by 8% per year over the next three years. After then, PG’s earnings are expected to grow 3% per year, and its dividend payout rate will remain constant. If PG’s equity cost of capital is 8.5% per year, what price does the dividend discount model predict PG stock should sell for today?

Question 3

• What is the cost of capital? What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?
• Do the net present value (NPV) and internal rate of return (IRR) always agree with respect to accepting–reject decisions? With respect to ranking decisions? Explain.
• Robin Millar has the opportunity to invest in project A which costs $18,000 today and promises to pay annual end-of-year payments of $4,400, $5,000, $5,000, $4,000, and $3,600 over the next 5 years. Determine the payback period for project A.

Question 4

International Business Machine is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collection period is expected to increase from 45 to 60 days, and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm.

Answer

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