CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 19, Problem 17QP
Summary Introduction
To determine: The Pre-tax Required Return on G’s Stock.
Introduction: The term dividends allude to that portion of proceeds of an organization which is circulated by the organization among its investors. It is the remuneration of the investors for investments made by them in the shares of the organization.
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The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 11 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class).
What is the pretax required return on Gordon’s stock?
The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 16 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class).
What is the pretax required return on Gordon’s stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 25 percent. Gecko has an expected earnings growth rate of 12 percent annually, and its stock price is expected to grow at this same rate. If the aftertax expected returns on the two stocks are equal (because they are in the same risk class), what is the pretax required return on Gordon’s stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Chapter 19 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
Ch. 19 - Dividend Policy Irrelevance How is it possible...Ch. 19 - Stock Repurchases What is the impact of a stock...Ch. 19 - Dividend Policy It is sometimes suggested that...Ch. 19 - Dividend Chronology On Tuesday, December 8,...Ch. 19 - Prob. 5CQCh. 19 - Prob. 6CQCh. 19 - Dividends and Stock Price Last month, Central...Ch. 19 - Prob. 8CQCh. 19 - Dividend Policy For initial public offerings of...Ch. 19 - Investment and Dividends The Phew Charitable Trust...
Ch. 19 - Use the following information to answer the next...Ch. 19 - Stock Repurchases How do you think this tax law...Ch. 19 - Dividends and Stock Value The growing perpetuity...Ch. 19 - Bird-in-the-Hand Argument The bird-in-the-hand...Ch. 19 - Dividends and Income Preference The desire for...Ch. 19 - Dividends and Clientele Cap Henderson owns Neotech...Ch. 19 - Prob. 17CQCh. 19 - Prob. 18CQCh. 19 - Prob. 19CQCh. 19 - Prob. 20CQCh. 19 - Prob. 1QPCh. 19 - Stock Dividends The owners equity accounts for...Ch. 19 - Prob. 3QPCh. 19 - Stock Splits and Stock Dividends Roll Corporation...Ch. 19 - Prob. 5QPCh. 19 - Share Repurchase In the previous problem, suppose...Ch. 19 - Prob. 7QPCh. 19 - Prob. 8QPCh. 19 - Prob. 9QPCh. 19 - Prob. 10QPCh. 19 - Prob. 11QPCh. 19 - Prob. 12QPCh. 19 - Stock Repurchase Flychucker Corporation is...Ch. 19 - Prob. 14QPCh. 19 - Prob. 15QPCh. 19 - Prob. 16QPCh. 19 - Prob. 17QPCh. 19 - Prob. 18QPCh. 19 - Prob. 19QPCh. 19 - Prob. 20QPCh. 19 - Prob. 1MCCh. 19 - Jessica believes that the company should use the...Ch. 19 - Prob. 3MCCh. 19 - Another option discussed by Tom, Jessica, and...Ch. 19 - Prob. 5MCCh. 19 - Does the question of whether the company should...
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- Your company doesn't face any taxes and has $768 million in assets, currently financed entirely with equity. Equity is worth $51.80 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Recession 0.10 $118 million Average Boom 0.75 0.15 $193 million $253 million The firm is considering switching to a 15 percent debt capital structure, and has determined that they would have to pay a 11 percent yield on perpetual debt in either event. What will be the standard deviation in EPS if they switch to the proposed capital structurearrow_forwardGTB, Inc. has a 25 percent tax rate and has $67.92 million in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.40 0.60 Expected EBIT in state $4,018,600 $16,244,200 The firm is considering switching to a 25-percent-debt capital structure, and has determined that it would have to pay a 9 percent yield on perpetual debt in either event. What will be the level of expected EPS if GTB switches to the proposed capital structure? (Do not round intermediate calculations and round your final answer to 2 decimal places.) Expected EPSarrow_forwardWazir Ali Corporation expects next year’s net income to be $15 million. The firm’s debt ratio is currently 35%. Wazir has $12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. Required According to the residual distribution model (assuming all payments are in the form of dividends), how large should Wazir’s dividend payout ratio be next year? (solve in excel)arrow_forward
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