Calculation of after tax rate of return using ebit

Reference no: EM1317119

Calculation of after tax rate of return using EBIT-EPS analysis

Firms C and D have time zero EBIT of $1,000. The required return on equity for both of these unlevered firms is 10%. The marginal corporate tax rate is 34%. Firm C has a dividend payout ratio of 20% and a dividend growth rate of 8%. Firm D has a dividend payout ratio of 80% and a dividend growth rate of 4%.

Note that in order for dividends to grow at a constant rate, given a fixed dividend payout ratio, EBIT must also grow at the same rate. Consequently, the EBIT growth rate must equal the dividend growth rate for each firm. Calculate the after-tax rate of return on each firm's reinvestment of earnings.
Δ [EBIT (1 - Tc]/RE^o)

Reference no: EM1317119

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