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?
[removed] More than
[removed] Less than
[removed] The same




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




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




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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