National Co. make these assumptions for valuation purposes: a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever. b. The income tax rate is 25%. c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year. d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%) e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10) f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return. g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year. h. Interest expense is deductible for income tax purposes 1. Compute for the value of the firm to the shareholders using dividend discount model 2. Compute for the dividend amount each year to the shareholders.
National Co. make these assumptions for valuation purposes:
a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.
b. The income tax rate is 25%.
c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.
d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)
e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)
f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12%
g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.
h. Interest expense is deductible for income tax purposes
1. Compute for the value of the firm to the shareholders using
2. Compute for the dividend amount each year to the shareholders.
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