(b) ABC plc and DEF plc have exactly the same risk, and both have a current stock price of £150. ABC plc pays no dividend and will have a price of £200 one year from now. DEF plc pays dividends and will have a price of £180 one year from now, after paying the dividend. The companies pay no taxes. Investors pay no taxes on capital gains but pay a 20% income tax on dividends. What is the value of the dividend that investors expect DEF plc to pay one year from today? Show your working, and state your reasoning.

(b) ABC plc and DEF plc have exactly the same risk, and both have a current stock price of £150. ABC plc pays no dividend and will have a price of £200 one year from now. DEF plc pays dividends and will have a price of £180 one year from now, after paying the dividend. The companies pay no taxes. Investors pay no taxes on capital gains but pay a 20% income tax on dividends. What is the value of the dividend that investors expect DEF plc to pay one year from today? Show your working, and state your reasoning.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 8 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 19 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon’s stock?
Astromet is financed entirely by common stock and has a beta of 1.50. The firm pays no taxes. The stock has a price-earnings multiple of 14.0 and is priced to offer a 10.6% expected return. The company decides to repurchase half the common stock and substitute an equal value of debt. Assume that the debt yields a risk-free 4.2%. Calculate the following: Required: a. The beta of the common stock after the refinancing b. The required return and risk premium on the common stock before the refinancing c. The required return and risk premium on the common stock after the refinancing d. The required return on the debt e. The required return on the company (i.e., stock and debt combined) after the refinancing If EBIT remains constant: f. What is the percentage increase in earnings per share after the refinancing? g-1. What is the new price-earnings multiple? g-2. Has anything happened to the stock price? Complete this question by entering your answers in the tabs below. Req A to E Req F to G2…
A share in pharmaceutical company X is estimated to be worth £200 if the clinical trials for a new painkiller it has developed show no significant side effects and £100 if they do. Assume that the market assigns equal probability to both events, while the company's executives have full knowledge of the trials' results and act to maximize the wealth of existing shareholders. Finally, assume that the company generates sufficient cash flows to meet all its investment needs and carries no debt.which if the following is most accurate? a.If the company announces an equity issue, its post announcement share price will jump to a level above £150 b.If the company announces an equity issue, its post announcement share price will drop to a level below £50 c.If the company announces an equity issue, its post announcement share price will drop to a level below £150 d.If the company does not announce an equity issue, its share price will drop to a level below £150
answer is D :)
LL corporation has $500M of excess cash. The firm has no debt and 1K shares outstanding with a current market price of $20 per share. LL’s board has decided to pay out this cash as a one time dividend. What is the ex-dividend price of a share in a perfect capital market?
KirkWood Corp.(KC) and Lenny Ltd.(LL) are in the same risk class. KC is expected to pay $2 per share dividend next year when the stock will sell for $30. LL has a no-dividend policy. Currently KC stock is selling for $40 per share. KC shareholders expect a $4 capital gain over the next year. Capital gains are taxed at 25%, and dividends are taxed at 30%. a.What is the current price of KC stock? b.If capital gains are also taxed at 28%, what is the share price of KC stock? c.Explain the result you found in part (b).
Keet Industries is currently an all-equity firm that pays no taxes. The market value of the firm’s equity is £1,500,000. The cost of the unlevered equity is 12% per annum. Keet plans to issue £500,000 in debt and use the proceeds to repurchase shares. The cost of debt is 8% per annum. What will Keet's cost of equity be after the share repurchase? Select one: 9% 12% 14% 20% None of the above
Becker industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 34000 shares of stock. The debt and equity option would consist of 17000 shares of stock plus $265000 of debt with an interest rate of 8 percent. What is the break even level of earnings before interest and taxes between these two options? Ignore taxes
Mantle Corporation is considering two equally risky investments: ∙ A $5,000 investment in preferred stock that yields 6.95%. ∙ A $5,000 investment in a corporate bond that yields 10%. What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 70% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.)
In a Modigliani and Miller world with no taxes, a 100% equity financed company has generated £1m cash flows this year. Consider three alternative policies: 1) pay £1m to shareholders as dividends, 2) buy back £1m worth of shares, 3) retain all cash flows. Determine which of the following statements is correct. The company's value is higher under policy 1 The company's value is higher under policy 2 Shareholders are indifferent between all three policies Shareholders are indifferent between policy 1 and policy 2, but prefer both policies to policy 3
Wyatt Oil pays a regular dividend of $2.0 per share. Typically, the stock price drops by $2.20 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 24%, but investors pay different tax rates on dividends. Absent transactions cost, the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to (%) (2 decimal places):
The total market value of the common stock of the Okefenokee Real Estate Company is $11.5 million, and the total value of its debt is $7.3 million. The treasurer estimates that the beta of the stock is currently 1.2 and that the expected risk premium on the market is 9%. The Treasury bill rate is 3%. Assume for simplicity that Okefenokee debt is risk-free and the company does not pay tax. a. What is the required return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. Estimate the company cost of capital. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. What is the discount rate for an expansion of the company's present business? Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored spectacles. The beta of unleveraged…

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