HelloWe had this example in Corporate Finance My question:How come they dont have to pay tax of the Capital gains of 15%?in the example it says 4$ Million - 1.5$ Million = 2.5$ Milllion in Tax why is it no 4 + 1.5 =5.5 $ Million in Tax Issuing Equity to Pay a DividendProblemSuppose a firm raises $10 million from sharcholders and uses this cash to pay them $10 millionin dividends. If the dividend is taxed at a 40% rate, and if capital gains are taxed at a 15% rate,how much will sharcholders receive after taxes?SolutionSharcholders will owe 40% of $10 million, or $4 million in dividend taxes. Because the valueof the firm will fall when the dividend is paid, shareholders' capital gain on the stock will be$10 million less when they sell, lowering their capital gains taxes by 15% of $10 million or $1.5million. Thus, in total, sharcholders will pay $4 million – $1.5 million = $2.5 million in taxes,and they will receive back only $7.5 million of their $10 million investment.

Capital gain tax is payable when gain is made on sale of non-current asset. Since, when the stock is…

Answered: Hello We had this example in Corporate…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter15: Distributions To Shareholders: Dividends And Repurchases

Section: Chapter Questions

Problem 3MC: Assume that IWT has completed its IPO and has a $112.5 million capital budget planned for the coming...

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Similar questions

Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?
Capital Structure Analysis Pettit Printing Company has a total market value of 100 million, consisting of 1 million shares selling for 50 per share and 50 million of 10% perpetual bonds now selling at par. The companys EBIT is 13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence, its stock is a zero-growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firms WACC and total corporate value under each capital structure?
Bayani Bakerys most recent FCF was 48 million; the FCF is expected to grow at a constant rate of 6%. The firms WACC is 12%, and it has 15 million shares of common stock outstanding. The firm has 30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has 368 million in debt and 60 million in preferred stock. a. What is the value of operations? b. Immediately prior to the repurchase, what is the intrinsic value of equity? c. Immediately prior to the repurchase, what is the intrinsic stock price? d. How many shares will be repurchased? How many shares will remain after the repurchase? e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?

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Hello We had this example in Corporate Finance My question: How come they dont have to pay tax of the Capital gains of 15%? in the example it says 4$ Million - 1.5$ Million = 2.5$ Milllion in Tax why is it no 4 + 1.5 =5.5 $ Million in Tax