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Yevaud Enterprises has $37 million in assets and expects to generate a return on assets of 12.6%. The stockholders require a 12.6% return on their investment as well. Yevaud can either: A. invest the entire cash flow generated this year in a new project with a nearly zero yet positive NPV; or B. pay out the entire amount as dividends and then raise cash for the project by issuing new shares. The new project will cost $4,662,000 in one year. Yevaud currently has 10,000,000 shares of common stock outstanding. 2. Calculate the value of the firms stock and the stockholders rate of return if Yevaud uses alternative A to finance the purchase of the project. 3. How many shares of stock must Yevaud issue in order to finance the new project in one year? Calculate the value of the firms stock and the stockholders rate of return if Yevaud uses alternative B to finance the project. 4. Will Yevauds choice regarding how to raise the money for the project affect the firms stock price in one year? 5. Assume that you currently own 50,000 shares of stock in Yevaud Enterprises and that Yevaud decided to pursue alternative A. How could you, as a stockholder, generate cash flows equal to those that would have followed from Yevauds pursuing alternative B? Would this change your percentage ownership of Yevauds total stock outstanding?

MINI-CASE: PAYOUT POLICY Yevaud Enterprises has the following historical prices. Each price shown is for the closing day of the month. The prices in the months with splits are the prices after the split has occurred. Date Closing Price ($) 79.94 124.38 100.06 125.13 118.75 172.06 172.19 128.13 116.94 321.25 192.00 126.44 Stock Split 2 for 1 Closing Price (S) 111.63 83.75 110.88 99.75 88.13 91.75 85.53 77.00 59.00 60.25 49.50 61.00 Stock Split Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Date Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 2 for 1 3 for 1 If you had purchased the stock for $61 on the last day of January 2008, what rate of return would vou have earned had vou sold it the last day of December 2009 (after adjusting for the stock splits)? 1. MINI-CASE: PAYOUT POLICY Yevaud Enterprises has the following historical prices. Each price shown is for the closing day of the month. The prices in the months with splits are the prices after the split has occurred. Date Closing Price ($) 79.94 124.38 100.06 125.13 118.75 172.06 172.19 128.13 116.94 321.25 192.00 126.44 Stock Split 2 for 1 Closing Price (S) 111.63 83.75 110.88 99.75 88.13 91.75 85.53 77.00 59.00 60.25 49.50 61.00 Stock Split Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Date Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 May-08 Apr-08 Mar-08 Feb-08 Jan-08 2 for 1 3 for 1 If you had purchased the stock for $61 on the last day of January 2008, what rate of return would vou have earned had vou sold it the last day of December 2009 (after adjusting for the stock splits)? 1

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