Find the market value of equity for both firms

Reference no: EM132368682

Assignment Questions -

Practice Question 1 - Dividends and Investment Policy

Suppose firms A and B are all-equity firms with a 10% cost of equity capital. Initially, both firms have $1000 in assets and can earn a 10% return on assets with certainty. Firm A pays out all of its earnings in dividends while Firm B has a 60% dividend payout. Assume that there are no taxes and that the first dividend is paid at the end of the first year. Find the market value of equity for both firms.

Practice Question 2 - Dividends and Investment Policy

Firms C and D have time zero EBIT of $1000. 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%.

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

b. Which firm has the higher market value?

c. Given a fixed dividend payout ratio, EBIT must grow at the same rate as dividends. Calculate the after-tax rate of return on each firm's reinvestment of earnings (EBIT(l-T_c)/R_E).

Practice Question 3 - Expected Return, Dividends, and Personal Taxes

Baytex Ltd and Maytex Ltd are in the same risk class. Shareholders expect Baytex to pay a $4 dividend per share next year when the stock will sell for $20. Maytex has a no dividend policy. Currently Maytex stock is selling for $20 per share. Maytex shareholders expect a $4 capital gain over the next year. Capital gains are not taxed. But dividend are taxed at 25%.

i. Calculate the current price per share for Baytex.

ii. Calculate the pre tax return for Baytex and Maytex

iii. If capital gains are taxed at 25%, calculate the price for Baytex

iv. Explain the result you found in (iii).

Reference no: EM132368682

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