What happens to the dividend irrelevance result

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Reference no: EM131316999

Swelter Manufacturing Company (SMC) currently has assets of $200 million and a required return of 10 percent on its 10 million shares outstanding.

The firm has an opportunity to invest in (minimally) positive-NPV projects that will cost $20 million. SMC needs to determine whether it should withhold this amount from dividends payable to finance the investments or pay out the dividends and issue new shares to finance the investments.

Show that the decision is irrelevant in a world of frictionless markets. What happens to the dividend-irrelevance result if a personal income tax of 15 percent is introduced into the model?

Reference no: EM131316999

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