minicase for company

1. The one time dividend will not affect the stock price. The value of the company will decline by the amount of the dividend. Ignoring taxes, shareholders wealth will not be affected because the stock price will drop by the amount of the dividend payment. 2. The value of the company could increase or decrease. If the company is overlevered, paying off debt can lower the interest rate on debt, and decrease financial distress costs. If there are no financial distress costs, capital structure theory argues that increasing debt can increase the value of the company because of the interest tax shield. 3. Yes he is correct, but the increase is irrelevant. 4. A regular dividend payment is something the company should probably not undertake. A company rarely begins regular dividend payments that it will be unable to continue in the future. Cessation of dividend payments is viewed a negative signal by the market. 5. The implication is that the company should not retain earnings unless the ROE of the new project is greater than the shareholders required return on equity. This is an intuitive result. Shareholders want the company to retain earnings for future growth if the earnings will earn a greater return than shareholders require. If the return on the retained earnings is lower than shareholders required return, the company is lowering shareholder value. 6. The decision does depend on the organizational form of the company. Money paid to shareholders of a corporation are dividends, and currently taxed at the lower dividend tax rate. Money paid to the owners of a LLC is considered income, and taxed at the applicable personal income tax rate.  Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price How will it affect the value of the company Electronic Timing, Inc. (ETI) needs to be careful on how it dispenses the extra cash as a dividend. Issuing the extra cash as a dividend