Concept explainers
a)
To identify: The marginal investors that determine the prices of the stocks.
a)
Explanation of Solution
The marginal investors who determine the prices of the stocks are institutions.
b)
To determine: The prices of the low-, medium-, and high-payout stocks.
b)
Explanation of Solution
Computation of price of the low-, medium-, and high-payout stocks is as follows:
Therefore, the price of low-, medium-, and high-payout stock is $166.67, $83.333, and $250 respectively.
c)
To determine: The after-tax returns of the three types of stock for each investor group.
c)
Explanation of Solution
The institution after-tax
Therefore, the individuals after-tax rate of return of low-, medium-, and high-payout stock is 9.15%, 8.10%, and 6% respectively.
For corporations, after-tax rate of return is as follows:
Therefore, the corporations after-tax rate of return of low-, medium-, and high-payout stock is 8.70%, 9.60%, and 11.40% respectively.
d)
To determine: The dollar amounts of the three types of stock held by each investor group.
d)
Explanation of Solution
Following table shows the dollar amounts of the three types of stock held by each investor group:
Low payout | Medium payout | High payout | |
Individuals | $80 billion | ||
Corporations | $10 billion | ||
Institutions | $20 billion | $50 billion | $110 billion |
Table no.1
Want to see more full solutions like this?
Chapter 16 Solutions
PRIN.OF CORP.FINANCE-CONNECT ACCESS
- The 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 Required: a. If each stock is priced at $115, 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 10% on dividends and 5% on capital gains? Stock Pension investor corporation Individual A 8.70 % 6.86 % __________% B 8.70 % ___________% ___________% C 8.70 % __________% __________% b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks…arrow_forwardQue Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from trading to capture the dividend?arrow_forwardParfois is evaluating an extra dividend versus a share repurchase. In either case $3,000 would be spent. Current earnings are $1.50 per share, and the stock currently sells for $58 per share. There are 600 shares outstanding. Ignore taxes and other imperfections:Evaluate the two alternatives in terms of the effect on the price per share of the stock and shareholder wealth.What will be the effect on American Eagle’s EPS and PE ratio under the two different scenarios?arrow_forward
- What is the WACC for Snuggly Baby Corp. if the tax rate is 25.00% and the firm has 6,182,000.00 shares of common equity priced at $14.00 each with an expected return of 19.74% and an expected real return of 14.61%; 1,001,000.00 shares of preferred equity priced at $32.00 each with an expected return of 16.14% and an expected real return of 11.16%; and 78,600.00 bonds that are priced at $923.00 each, and have a current yield of 11.22%, a yield-to-maturity of 11.63%, and a coupon rate of 10.38%?(Round the value to 100th decimal)arrow_forwardANSWER ALL. PLEASE SHOW YOUR WORKING SOLUTIONS. 1) Based on current market values, Shawn Supply's capital structure is 30% debt, 20% preferred stock, and 50% common stock. When using book values, capital structure is 25% debt, 10% preferred stock, and 65% common stock. The required return on each component is: debt,10% before tax; preferred stock, 11%; and common stock,18%. The marginal tax rate is 35%. What rate of return must Shawn Supply’s earn on its investments if the value of the firm is to remain unchanged? 2) Plants Corp. has $2,575,000 of debt, $550,000 of preferred stock, and $18,125,000 of common equity. Plants Corp.'s after-tax cost of debt is 5.25%, preferred stock has a cost of 6.35%, and newly issued common stock has a cost of 14.05%. What is Plants Corp.'s weighted average cost of capital?arrow_forwardYou are told that one corporation just issued $100 million of preferred stock and anotherpurchased $100 million of preferred stock as an investment. You are also told that one firmhas an effective tax rate of 20%, whereas the other is in the 35% tax bracket. Which firm ismore likely to have bought the preferred? Explain.arrow_forward
- Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per sharearrow_forwardTwo corporations A and B have exactly the same risk, and both have a current stock price of $100. Corporation A pays no dividend and will have a price of $120 one year from now. Corporation B pays dividends and will have a price of $113 one year from now after paying the dividend. The corporations pay no taxes and investors pay no taxes on capital gains, but pay a 30% income on dividends. What is the value of the dividend that investors expect corporation B to pay one year from today? Please answer fast i give upvotearrow_forwardThe Fourth Corp. is evaluating extra cash dividends versus share repurchases. In either case, $6,675 will be spent. Current earnings are $2.8 per share and the stock currently sells for $67 per share. There are 1,500 shares outstanding. Ignore taxes and any information asymmetry in the financial market. Which of the following is correct? Group of answer choices Shareholder wealth is the same regardless of which payout policy is chosen. Shareholder wealth will be lower if the firm repurchases shares because shares outstanding is reduced as a result of the repurchase. Shareholder wealth will be lower if the firm pays extra cash dividends because share price is lower. Shareholder wealth will be higher if the firm repurchases shares because repurchases can boost share price.arrow_forward
- Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or b)distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required:b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.arrow_forwardPlease show your work for the following Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporate tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its debt level according to the relation: PV of financial distress = 800,000 × (D/V*)2. What is the firm's levered value if it issues $200,000 of perpetual debt to buy back stock? Multiple Choice A) $920,000. B) $869,555. C) $792,000. D) $350,000.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT