(b) ABC plc and DEF plc have exactly the same risk, and both have a current stock price of £150. ABC plc pays no dividend and will have a price of £200 one year from now. DEF plc pays dividends and will have a price of £180 one year from now, after paying the dividend. The companies pay no taxes. Investors pay no taxes on capital gains but pay a 20% income tax on dividends. What is the value of the dividend that investors expect DEF plc to pay one year from today? Show your working, and state your reasoning.

(b) ABC plc and DEF plc have exactly the same risk, and both have a current stock price of £150. ABC plc pays no dividend and will have a price of £200 one year from now. DEF plc pays dividends and will have a price of £180 one year from now, after paying the dividend. The companies pay no taxes. Investors pay no taxes on capital gains but pay a 20% income tax on dividends. What is the value of the dividend that investors expect DEF plc to pay one year from today? Show your working, and state your reasoning.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Two 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 upvote
The Company KNV is in the construction industry and has outstanding debts valued at €4 million and its equity is valued at €6 million. The shares of KNV have a beta of 1.2 and the market has an expected risk premium of 8% p.a. The risk free rate is 4% p.a. and the KNV is risk free. The company doesn't pay any tax. Required: a) What is the required return on the KNV stock?. b) Estimate the company's cost of capital. c) Suppose the company wants to diversify its business and invest in the manufacturing of building materials. The beta of an unleveraged firm in the building materials sector is 1.1. Estimate the required return on KNV's new venture.
Assume capital markets are perfect. Kabo Industries currently has $12 million invested in shortterm Treasury securities paying 8%, and it pays out the interest payments on these securitieseach year as a dividend. The board is considering selling the Treasury securities and paying outthe proceeds as a one-time dividend payment.i. If the board went ahead with this plan, what would happen to the value of Kabo stock uponthe announcement of a change in policy?ii. What would happen to the value of Kabo stock on the ex-dividend date of the one-timedividend?iii. Given these price reactions, will this decision benefit investors?
The common stock and debt of Northern Sludge are valued at $56 million and $23 million, respectively. Investors currently require a 15% return on the common stock and an 7% return on the debt. If Northern Sludge Issues an additional $5 million of common stock and uses this money to retire debt, what is the new expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Expected stock return %
You own all the equity of R.G.C. I Ltd. The company has no debt. The company's annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 30%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. i. What is the value of the unlevered firm? ii. What is the value of the levered firm? iii. Assuming a bankruptey cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost?
Hawar International is a shipping firm with a current share price of $4.94 and 9.8 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $8.7 million and repurchasing shares, that Hawar pays a corporate tax rate of 25%, and that shareholders expect the change in debt to be permanent. a. If the only imperfection is corporate taxes, what will be the share price after this announcement? b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? a. If the only imperfection is corporate taxes, what will be the share price after this announcement? The share price after this announcement will be $ per share. (Round to the nearest cent.) b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.99 after this…
You own all the equity of R.G.C. I Ltd. The company has no debt. The company’s annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 35%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. What is the total cash flow to the investors? What is the value of the unlevered firm? What is the value of the levered firm? Assuming a bankruptcy cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost?
KirkWood Corp.(KC) and Lenny Ltd.(LL) are in the same risk class. KC is expected to pay $2 per share dividend next year when the stock will sell for $30. LL has a no-dividend policy. Currently KC stock is selling for $40 per share. KC shareholders expect a $4 capital gain over the next year. Capital gains are taxed at 25%, and dividends are taxed at 30%. a.What is the current price of KC stock? b.If capital gains are also taxed at 28%, what is the share price of KC stock? c.Explain the result you found in part (b).
The common stock and debt of Northern Sludge are valued at $66 million and $34 million, respectively. Investors currently require a return of 15.6% on the common stock and 8.1% on the debt. If Northern Sludge issues an additional $17 million of common stock and uses this money to retire debt, what happens to the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt and that there are no taxes (do not round intermediate calculations. Enter your answer as a percent rounded to two decimal places).
Please show the solution. Thank you. 1. The market value of Bato Company’s ordinary shares (book value: P65M) is estimated at P60M and the market value of its interest bearing debt (book value: P35M) is estimated at P40M. The average before tax yield on these liabilities is 15% per year. Income taxes are 40%. The company is expected to pay a dividend of P10 per share and the shares are selling at a price of P100 per share. The growth rate of dividend is projected to be 2.5% per year. What is the weighted average cost of capital (WACC) of the company as a whole?
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 share
Lo, Incorporated doesn't face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $7 per hare, 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 bon 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 Pessimistic 0.45 $5 million Expected EPS Optimistic 0.55 $ 19 million The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent vield on perpetual debt in either event. What will be the level of expected EPS if the firm switches to the proposed capital structure? Note: Do not round intermediate calculations and round your final answer to 2 decimal places.

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