Expected dividend and market value of the two firms

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Reference no: EM1316048

Expected dividend and market value of the two firms.

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%.

1. What is each firm's expected dividend at the end of the next year?

2. Which firm has the higher market value?

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

Reference no: EM1316048

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