Risk and Controls
Autor: Antonio • October 1, 2013 • Coursework • 270 Words (2 Pages) • 1,133 Views
Dividends received = $6,300
So the return the shareholder expects is:
R = $6,300/$48,750 R = .1292 or 12.92%
b. To generate exactly the same cash flows in the other company, the shareholder needs to match the capital structure of St. Louis. The shareholder should sell all shares in St. Romuald. This will net $48,750. The shareholder should then borrow $48,750. This will create an interest cash flow of:
Interest cash flow = .08(–$48,750) Interest cash flow = –$3,900
The investor should then use the proceeds of the stock sale and the loan to buy shares in St. Louis. The investor will receive dividends in proportion to the percentage of the company's share they own. The total dividends received by the shareholder will be:
Dividends received = $68,000($97,500/$650,000) Dividends received = $10,200
Dividends received = $6,300
So the return the shareholder expects is:
R = $6,300/$48,750 R = .1292 or 12.92%
b. To generate exactly the same cash flows in the other company, the shareholder needs to match the capital structure of St. Louis. The shareholder should sell all shares in St. Romuald. This will net $48,750. The shareholder should then borrow $48,750. This will create an interest cash flow of:
Interest cash flow = .08(–$48,750) Interest cash flow = –$3,900
The investor should then use the proceeds of the stock sale and the loan to buy shares in St. Louis. The investor will receive dividends in proportion to the percentage of the company's share they own. The total dividends received by the shareholder will be:
Dividends received = $68,000($97,500/$650,000) Dividends received
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