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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
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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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.

  1. If the corporation retains for 15 years and then pays a dividend the investor nets $__________.
  2. If the corporation pays an immediate dividend, the investor will have (after 15 years) $_________
**Problems** 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) $______. 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? ______ percent. 3. *(Continuation of problem 2)* 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 $______. 4. *(Continuation of problem 3)* Define \( M = \frac{PV}{C} \) and \( P_0 = \$110 \) 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 $______ per share. 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 $______. **Bibliography** 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),
Transcribed Image Text:**Problems** 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) $______. 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? ______ percent. 3. *(Continuation of problem 2)* 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 $______. 4. *(Continuation of problem 3)* Define \( M = \frac{PV}{C} \) and \( P_0 = \$110 \) 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 $______ per share. 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 $______. **Bibliography** 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),
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