After-tax returns on each dollar of corporate earnings

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Reference no: EM132058718

1. You are a financial advisor and you have estimated that the expected return of Xyon stock is 10% with a standard deviation of 16%. A stock from the same industry, Yane, has a 90% chance of returning a profit of 10% and a 10% chance of losing 20%.

(a) Your client, Ms. Rice says she's indifferent between investing in Xyon and Yane. What should her risk aversion coefficient (A=?) be?

2. Suppose that the corporate income tax rate is 30%, the personal income tax rate on dividend income and the interest tax rate are both 35%, and the capital gains tax rate is 20%. Compare the after-tax returns on each dollar of corporate earnings under three investment financing strategies:

a. the corporation finances using debt

b. the corporation finances by issuing equity but does not pay dividends

c. the corporation finances by equity and pays all its income in dividends

Reference no: EM132058718

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