Calculation of after tax rate of return using ebit

Assignment Help Finance Basics

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

Questions Cloud

Compute and interpreting pearson-s r using alpha level : Use alpha level. 05 to compute and interpret Pearson's r and to test whether it is important (using all your steps for hypothesis test).

Hypothesis test for one-way analysis of variance : Is there evidence to suggest a difference in the mean waiting times at the four body shops?

Find the maximum harvest : Find the maximum harvest.

Complexometric titration and stoichiometry : Complexometric titration and stoichiometry - How many grams of chloride ion were present in sample

Calculation of after tax rate of return using ebit : Calculation of after tax rate of return using EBIT-EPS analysis Note that in order for dividends to grow at a constant rate, given a fixed dividend payout ratio and EBIT must also grow at the same rate.

Comparing the product attributes of companies : Compare and contrast their product attributes in order to understand whether the offerings are becoming differentiated or more alike as a result.

Reasonable guideline-significance level : At the .05 significance level, can we conclude that the guideline is still reasonable?

Computational biophysics & nanoscale simulations : Describe using no more than 200 words, what is a protein and how could we model and simulate it using classical mechanics and computer programs.

Creating confidence interval for mean overall duration : Create a 99% confidence interval for mean overall duration of symptoms in population of individuals who used zinc lozenges.

User Account

All Pages