Aqua Adventures currently generates net income of $500,000 every year, all of which is paid out...

Aqua Adventures currently generates net income of $500,000 every year, all of which is paid out in dividends, and expects no future growth. Aqua has 200,000 shares outstanding, and investors require an 8% return on the company's shares. Assume that new management is hired to grow the company. One plan for the company is to invest its earnings of $500,000 per year for 1 year in a new project. If Aqua goes with the new project it will not be able to pay a dividend for the next year. However, the new project will increase net income to $570,000 in the second year and onward, all which will be paid out as dividends.

Calculate the share price if the company maintains its current no-growth policy. Calculate the share price if the company goes with the new project. Briefly explain why

the share price has gone higher or lower.
What must the minimum increase in net income be so that investors are equally well off

between its current no-growth policy and its proposed new project?

Solutions

Expert Solution

1]	Current dividend = 500000/200000 = $2.5
	Price of the share under the current policy = 2.5/8% =	$ 31.25
2]	Dividend in the second year if the new project is implemented = 570000/200000 = $2.85
	Share price at the end of the 1st year = 2.85/8% =	$ 35.63
	Share price now if the new project is undertaken = 35.63/1.08 =	$ 32.98
3]	The share price has gone up as the expected cash flows
	in the form of dividends will increase if, the new
	project is implemented.
4]	Price of the share after 1 year should be 31.25*108% =	$ 33.75
	For this price, the DPS should be 33.75*8% =	$ 2.70
	Net income to be available = 200000*2.70 =	$ 540,000

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Online Network Inc. has a net income of $500,000 in the current fiscal year. There are...

Online Network Inc. has a net income of $500,000 in the current fiscal year. There are 100,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $1.2 million. The $1.2 million is represented by 1,200 different $1,000 bonds. Each $1,000 bond pays 4 percent interest. The conversion ratio is 20. The firm is in a 20 percent tax bracket. . Compute basic earnings per share. Compute diluted earnings per share

Adcock Corp. had $500,000 net income in 2020. For all of 2020, there were 200,000 shares...

Adcock Corp. had $500,000 net income in 2020. For all of 2020, there were 200,000 shares of Adcock’s common stock outstanding. There were also 30,000 options outstanding all year. Each option allowed the holder to buy one share of common stock at $40 a share. The market price of the common stock averaged $50 during 2020. The tax rate is 30%. During all of 2020, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays...

a) Explain why net income may be (or not) a standard by which every company’s value...

a) Explain why net income may be (or not) a standard by which every company’s value and risk can be compared. b) How is EBITDA dependent on the depreciable lives of assets?

Zhou owns a nonrental business with two separate departments. Department A generates net income of $70,000, and Department B generates a net loss of $58,000.

Zhou owns a nonrental business with two separate departments. Department A generates net income of $70,000, and Department B generates a net loss of $58,000. Zhou participates 800 hours in the operations of Department A and 300 hours in the operations of Department B. If Zhou is allowed to treat the departments as components of a single activity, calculate the amount of the Department B loss that can be offset against the income from Department A in the current year.

Western Corporation, a calendar year, accrual basis corporation, reported $500,000 of net income after tax on...

Western Corporation, a calendar year, accrual basis corporation, reported $500,000 of net income after tax on its 2019 financial statements prepared in accordance with GAAP. The corporation’s books and records reveal the following information: Western’s book income included $15,000 of dividends, received from a domestic corporation in which Western owns less than 1 percent of the outstanding stock. Western’s depreciation expense per books was $55,000, and its MACRS depreciation was $70,000. Western earned $5,000 of interest from municipal bonds and...

What is the net income of the corporation? Income Statement Items ($) Revenues Sales Revenue 500,000...

What is the net income of the corporation? Income Statement Items ($) Revenues Sales Revenue 500,000 Cost of Goods Sold 20,000 Administration Expenses 20,000 Selling expenses 30,000 Depreciation 15,000 Taxes 15,000 A. $400,000 B. $100,000 C. $450,000 D. $300,000 E. $150,000

Net income for the year was $117,000. Dividends of $114,000 cash were declared and paid. Scoreteck’s...

Net income for the year was $117,000. Dividends of $114,000 cash were declared and paid. Scoreteck’s only noncash expense was $87,000 of depreciation. The company purchased plant assets for $87,000 cash. Notes payable of $37,000 were issued for $37,000 cash. Complete the following spreadsheet in preparation of the statement of cash flows. (The statement of cash flows is not required.) Report operating activities under the indirect method. (Enter all amounts as positive values.) SCORETECK CORPORATION Spreadsheet for Statement of...

Suppose that 80% of widgets produced by a factory that generates thousands of widgets every year...

Suppose that 80% of widgets produced by a factory that generates thousands of widgets every year are of acceptable quality. (a) If a quality control inspector selects 3 widgets independently and at random, what is the probability that at least one will not be of acceptable quality? (b) Suppose that a quality control inspector selects a random sample of 60 widgets to determine the proportion that have an acceptable level of quality. If Pˆ is the proportion of acceptable widgets...

Your all-equity firm generates $60M per year in perpetual free cash flows. The firm pays out...

Your all-equity firm generates $60M per year in perpetual free cash flows. The firm pays out the entire free cash flows to stockholders each year and is about to pay the $60M generated this year. Analysis of comparable firms tells you that your asset cost of capital is 15 percent. Assume that there are 1M shares outstanding and the capital market is perfect. a)What is the price per share for this firm att=0 just before the firm paysout the $60M?This...

Mr. Johnson has Net Income For Tax Purposes of $250,000, all of which is employment income....

Mr. Johnson has Net Income For Tax Purposes of $250,000, all of which is employment income. His employer has withheld and remitted the required EI and CPP amounts. Mr. Johnson was married on December 1, 2019. His wife, an accounting student, had salary of $27,500. Her tuition fees for 2019 were $4,500 and textbook costs were $800. She wishes to transfer any amounts to her husband. REQUIRED: Determine the maximum amount of 2019 personal tax credits, including transfers from a...

Subjects