whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes . Introduction: Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

Question

Suppose that AC Corp. distributes its cash to shareholders as a dividend and raises new equity to fund the investment. For each question assume the firm operates in perfect capital markets. a.) How many shares will AC need to issue to fund the investment? b.) What is the new stock price? c.) After the transaction, what is the total value of existing shareholders' shares plus the cash payout? d.) What is the total value of the new shareholders' shares (assume that old shareholders do not purchase any of the new shares)? e.) What is the change in firm value due to this transaction? f.) Suppose AC used its cash to fund the investment instead, what is the total value of the shareholders' shares? Relevant information for AC Corp. is given below Cash 30 Shares outstanding 50 Current share price $6.60 Amount needed to…

Answer 1

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

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Suppose that AC Corp. distributes its cash to shareholders as a dividend and raises new equity to fund the investment. For each question assume the firm operates in perfect capital markets. a.) How many shares will AC need to issue to fund the investment? b.) What is the new stock price? c.) After the transaction, what is the total value of existing shareholders' shares plus the cash payout? d.) What is the total value of the new shareholders' shares (assume that old shareholders do not purchase any of the new shares)? e.) What is the change in firm value due to this transaction? f.) Suppose AC used its cash to fund the investment instead, what is the total value of the shareholders' shares? Relevant information for AC Corp. is given below Cash 30 Shares outstanding 50 Current share price $6.60 Amount needed to…

Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)

If a company sells new shares of stock to raise money, this will result in a ____ to the contributed capital accounts. A.Debit B.Credit

Answer 2

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

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Answer 3

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

Expert Solution & Answer

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Answer 4

Question

Definition Definition Tax imposed by the government on the "gain" or increase in the value of an asset at the time of its sale by the owner. Capital gain is computed based on the purchase price and sale price of the asset. If the sale price of the asset is more than the purchase price, there is a gain on the sale of asset. A tax is imposed on such gain in accordance with the applicable tax rates at the time of sale.

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

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Answer 5

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

Answer 6

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

Answer 7

Chapter 14, Problem 10Q

a.

Summary Introduction

To explain: whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

Introduction:

Dividend Policy: It is the rules and regulations or protocol which a company sets to share its earning with its shareholders Dividend’s payment include payment to be made legally as well as financially.

Answer 8

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

Answer 9

b.

Summary Introduction

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

Answer 10

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

Answer 11

c.

Summary Introduction

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

Answer 12

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

Answer 13

d.

Summary Introduction

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

Answer 14

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

Answer 15

e.

Summary Introduction

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

Answer 16

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

Answer 17

f.

Summary Introduction

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

Answer 18

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Ch. 14 - Prob. 1Q Ch. 14 - Prob. 2Q Ch. 14 - Would it ever be rational for a firm to borrow...Ch. 14 - Modigliani and Miller (MM), on the one hand, and...Ch. 14 - Prob. 5Q Ch. 14 - One position expressed in the financial literature...Ch. 14 - Prob. 7Q Ch. 14 - What is the difference between a stock dividend...Ch. 14 - Most firms like to have their stock selling at a...Ch. 14 - Prob. 10Q

Solution Summary: The author explains whether it is true or false if a firm repurchases its stock in open market and the shareholder who tender the stock are subject to capital gain taxes.

To explain: whether it is true or false if holder of 100 shares will own 200 share after company’s stock splits 2 for 1.

To explain: whether it is true or false if dividend reinvestment plan maximizes the amount of equity capital available to the firm.

To explain: whether it is true or false that tax codes encourages company to pay a large percentage of their net income in the form of dividends.

To explain: whether it is true or false if company’s investors who prefer large dividends is unlikely to adopt a residual dividend policy.

To explain: whether it is true or false if all other things remain constant a firm’s dividend payout will tend to increase whenever the firm’s investment opportunities improve if it is following a residual dividend policy.

Chapter 14 Solutions