chapter 10 question 1 Assume an investor can earn 0.15 before tax and 0.12 after tax. A corporation can earn 0.14 after corporate tax. It has $100 available for investment. The tax rate on dividends and capital gains is 0.15. If the corporation retains for 15 years and then pays a dividend the investor nets $__________. If the corporation pays an immediate dividend, the investor will have (after 15 years) $_________
chapter 10 question 1 Assume an investor can earn 0.15 before tax and 0.12 after tax. A corporation can earn 0.14 after corporate tax. It has $100 available for investment. The tax rate on dividends and capital gains is 0.15. If the corporation retains for 15 years and then pays a dividend the investor nets $__________. If the corporation pays an immediate dividend, the investor will have (after 15 years) $_________
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
Related questions
Question
chapter 10 question 1 Assume an investor can earn 0.15 before tax and 0.12 after tax. A corporation can earn 0.14 after corporate tax. It has $100 available for investment.
The tax rate on dividends and
- If the corporation retains for 15 years and then pays a dividend the investor nets $__________.
- If the corporation pays an immediate dividend, the investor will have (after 15 years) $_________
![A. Week 5 Assignment
A Bookshelf - The Capital Budgetin X
d VitalSource Bookshelf: The Capita X
b My Questions | bartleby
+
A online.vitalsource.com/#/books/9781135656232/cfi/6/36!/4/170/2@0.00:0
A < 10. Distribution Polic...
Problems
Go to 10. Distribution Policy and
Capital Budgeting
1. Assume an investor can earn 0.15 before tax and 0.12 after tax. A corporation can earn 0.14 after corporate tax. It has $100 available for
investment.
The tax rate on dividends and capital gains is 0.15.
a. If the corporation retains for 15 years and then pays a dividend the investor nets $
b. If the corporation pays an immediate dividend, the investor will have (after 15 years) $
earnings
2. (Continuation of problem 1) Now assume the investor has $1,000. What minimum return does the corporation paying an annual dividend have
to earn to justify making the investment?
3. (Continuation of problem 2)
Investment: new capital
_percent.
Share repurchase versus real
a. If the investor invests $1,000 in the market, the investor will have each year $
b. If the investor invests $1,000 in the corporation that can earn 0.14, the investor will have each year a dividend (after tax) of
investment
A different required return
4. (Continuation of problem 3) Define M = P/C and Po = $110 and C = $10 (free cash flow per share) so that M = 11.
Determine the return earned by the firm if it repurchases shares.
5. (Continuation of problem 4) Assume there are initially 1,000,000 shares outstanding. Assume the total stock value one year later is
$110,000,000 and that the firm buys 10,000,000/110 = 90,909 shares at time 1.
The price at time 1 will be $
6. (Continuation of problems 4 and 5) Assume the $10,000,000 of free cash flow at time one is used to buy an investment that earns 0.10 instead
of repurchasing shares. The value of a share at time one is $
Model
Maintenance cap-ex
per share.
The capital structure
Risk assumptions
Bibliography
The derivation of 1/(M-1)
Diamond, D. and R. Verrecchia, "Disclosure, Liquidity, and the Cost of Equity Capital," Journal of Finance, 46, 1991, pp. 1325-60
Elton, Edwin, J., "Expected Return, Realized Return, and Asset Pricing Tests," Journal of Finance, 54 (4), 1999, pp. 1199-220.
Fama, Eugene F. and Kenneth R. French, "The Cross-section of Expected Stock Returns," Journal of Finance, 47, 1992, pp. 427-65.
Conclusions
Problems
Bibliography
7:58 PM
P Type here to search
a
10/24/2020
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Transcribed Image Text:A. Week 5 Assignment
A Bookshelf - The Capital Budgetin X
d VitalSource Bookshelf: The Capita X
b My Questions | bartleby
+
A online.vitalsource.com/#/books/9781135656232/cfi/6/36!/4/170/2@0.00:0
A < 10. Distribution Polic...
Problems
Go to 10. Distribution Policy and
Capital Budgeting
1. Assume an investor can earn 0.15 before tax and 0.12 after tax. A corporation can earn 0.14 after corporate tax. It has $100 available for
investment.
The tax rate on dividends and capital gains is 0.15.
a. If the corporation retains for 15 years and then pays a dividend the investor nets $
b. If the corporation pays an immediate dividend, the investor will have (after 15 years) $
earnings
2. (Continuation of problem 1) Now assume the investor has $1,000. What minimum return does the corporation paying an annual dividend have
to earn to justify making the investment?
3. (Continuation of problem 2)
Investment: new capital
_percent.
Share repurchase versus real
a. If the investor invests $1,000 in the market, the investor will have each year $
b. If the investor invests $1,000 in the corporation that can earn 0.14, the investor will have each year a dividend (after tax) of
investment
A different required return
4. (Continuation of problem 3) Define M = P/C and Po = $110 and C = $10 (free cash flow per share) so that M = 11.
Determine the return earned by the firm if it repurchases shares.
5. (Continuation of problem 4) Assume there are initially 1,000,000 shares outstanding. Assume the total stock value one year later is
$110,000,000 and that the firm buys 10,000,000/110 = 90,909 shares at time 1.
The price at time 1 will be $
6. (Continuation of problems 4 and 5) Assume the $10,000,000 of free cash flow at time one is used to buy an investment that earns 0.10 instead
of repurchasing shares. The value of a share at time one is $
Model
Maintenance cap-ex
per share.
The capital structure
Risk assumptions
Bibliography
The derivation of 1/(M-1)
Diamond, D. and R. Verrecchia, "Disclosure, Liquidity, and the Cost of Equity Capital," Journal of Finance, 46, 1991, pp. 1325-60
Elton, Edwin, J., "Expected Return, Realized Return, and Asset Pricing Tests," Journal of Finance, 54 (4), 1999, pp. 1199-220.
Fama, Eugene F. and Kenneth R. French, "The Cross-section of Expected Stock Returns," Journal of Finance, 47, 1992, pp. 427-65.
Conclusions
Problems
Bibliography
7:58 PM
P Type here to search
a
10/24/2020
!!
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