Finance-Equity Capital
| Question –
Consolidated now decides to increase next year’s dividend to $20 a share, without changing its investment or borrowing plans. Thereafter the company will revert to its policy of distributing $10 million a year. |
| c. | How much new equity capital will the company need to raise to finance the extra dividend payment? (Enter your answer in millions.) |
| New equity | $ [removed]million |
| d. | What will be the total present value of dividends paid each year on the new shares that the company will need to issue? (Enter your answer in millions.) |
| Present value | $ [removed]million |
| e. | What will be the transfer of value from the old shareholders to the new shareholders? (Enter your answer in millions.) |
| Transfer of value | $ [removed]million |
| f. | Is this figure more than, less than, or the same as the extra dividend that the old shareholders will receive? | ||||||
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| 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 | $ 3 |
| B | 13 | 13 |
| C | 27 | 0 |
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| a. | If each stock is priced at $100, 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 45% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) |
| Stock | Pension | Investor Corporation | Individual |
| A | |||
| B | |||
| C | |||
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| b. | Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. |
| Stock | Price |
| A | $ |
| B | $ |
| C | $ |
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