Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 17, Problem 19P
Summary Introduction
To determine: The highest
Introduction:
Effective tax rates mainly depend on the investors’ tax rates, which they are facing on the dividends and
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Chapter 17 Solutions
Corporate Finance
Ch. 17.1 - Prob. 1CCCh. 17.1 - Prob. 2CCCh. 17.2 - Prob. 1CCCh. 17.2 - In a perfect capital market, how important is the...Ch. 17.3 - Prob. 1CCCh. 17.3 - Prob. 2CCCh. 17.4 - Prob. 1CCCh. 17.4 - Prob. 2CCCh. 17.5 - Is there an advantage for a firm to retain its...Ch. 17.5 - Prob. 2CC
Ch. 17.6 - Prob. 1CCCh. 17.6 - Prob. 2CCCh. 17.7 - Prob. 1CCCh. 17.7 - Prob. 2CCCh. 17 - Prob. 1PCh. 17 - ABC Corporation announced that it will pay a...Ch. 17 - Prob. 3PCh. 17 - RFC Corp. has announced a 1 dividend. If RFCs...Ch. 17 - Prob. 5PCh. 17 - KMS Corporation has assets with a market value of...Ch. 17 - Natsam Corporation has 250 million of excess cash....Ch. 17 - Suppose the board of Natsam Corporation decided to...Ch. 17 - Prob. 9PCh. 17 - Suppose BE Press paid dividends at the end of each...Ch. 17 - The HNH Corporation will pay a constant dividend...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Suppose that all capital gains are taxed at a 25%...Ch. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - A stock that you know is held by long-term...Ch. 17 - Clovix Corporation has 50 million in cash, 10...Ch. 17 - Assume capital markets are perfect. Kay Industries...Ch. 17 - Redo Problem 22., but assume that Kay must pay a...Ch. 17 - Harris Corporation has 250 million in cash, and...Ch. 17 - Redo Problem 22, but assume the following: a....Ch. 17 - Prob. 26PCh. 17 - Prob. 27PCh. 17 - Explain under which conditions an increase in the...Ch. 17 - Why is an announcement of a share repurchase...Ch. 17 - AMC Corporation currently has an enterprise value...Ch. 17 - Prob. 31PCh. 17 - Prob. 32PCh. 17 - Explain why most companies choose to pay stock...Ch. 17 - Prob. 34PCh. 17 - Prob. 35P
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- c. If Tp = 15 percent and TG = 30 percent, how much will the share price fall? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Share price d. Suppose the only owners of stock are corporations. Recall that Corporations get at least a 50 percent exemption from taxation on the dividend income they receive, but they do not get such an exemption on capital gains. If the corporation's income and capital gains tax rates are both 21 percent, what does this model predict the ex- dividend share price will be? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Share price D N. Elton and M. Gruber, "Marginal Stockholder Tax Rates and the Clientele Effect," Review of Economics and Statistics 52 (February 1970).arrow_forwarda. What is the relative tax advantage of corporate debt if the corporate tax rate is TC=0.22, the personal tax rate on interest is TpD=0.37, but all equity income is received as capital gains and escapes tax entirely ( TpE=0 )? b. How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 10% ? Note: Do not round intermediate calculations. Round your answers to 4 decimal places.arrow_forwardWhat is the relative tax advantage of corporate debt if the corporate tax rate is Tc=0.35, the personal tax rate is Tp=0.35, but all equity income is received as capital gains and escapes tax entirely ( T pE =0)? How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%?arrow_forward
- 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.)arrow_forwardAs discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: (Po Px)/D = (1 Tp)/(1-TG) where PO is the price just before the stock goes ex, Px is the ex-dividend share price, D is the amount of the dividend per share, Tp is the relevant marginal personal tax rate on dividends, and TG is the effective marginal tax rate on capital gains.arrow_forwardSince 70% of the preferred dividends received by a corporation or institutional investor are excluded from taxable income, the component cost of equity for a company that pays half of its earnings out as common dividends and half as preferred dividends should, theoretically, be: Cost of equity = 8 × 0.30 × 0.50 + ¯ps × (1 − T) × 0.70 × 0.50, where T is the tax rate. TRUE or FALSE? False Truearrow_forward
- Burger Queen can sell preferred stock for $75 with an estimated flotation cost of $5.00. It is anticipated the preferred stock will pay $5 per share in dividends. a. Compute the cost of preferred stock for Burger Queen. b. Do we need to make a tax adjustment for the issuing firm?arrow_forwardYou buy stock for $30 per share and sell it for $33 per share after holding it for slightly after a yer and collecting a $0.75 per share dividend. Youre ordinary income tax rate is 28% and your capital gains tax rate is 20%. Youre after tax return rate is? A. 8.00% B. 10.25% C. 12.5% D. 9.8% E.8.75%arrow_forwardPlease answer both questions 1 and 2 and show working. 1. Mantle Corporation is considering two equally risky investments: ∙ A $5,000 investment in preferred stock that yields 6.75%. ∙ A $5,000 investment in a corporate bond that yields 10.00%. What is the breakeven corporate tax rate that makes the company indifferent between the two investments? Assume a 70.00% dividend exclusion for tax on dividends. (Do not round your intermediate answer and round your final answer to two decimal places.) a. 50.13% b. 40.75% c. 46.87% d. 37.08% e. 34.23% 2. Wie Corp's sales last year were $280,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much…arrow_forward
- Vijayarrow_forward1. 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 s b. If the corporation pays an immediate dividend, the investor will have (after 15 years) S 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) percent. 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 = 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…arrow_forwardThe expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $0 $10 B 5 5 C 10 0 A. If each stock is priced at $160, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) B. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)arrow_forward
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