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Suppose we have two equally risky firms, Firm A and B. Firm B’s shares are currently worth $100, and they are expected to be worth $120 in one year. Personal dividend tax rate is 30%, and capital

Suppose we have two equally risky firms, Firm A and B. Firm B’s shares are currently worth $100, and they are expected to be worth $120 in one year. Personal dividend tax rate is 30%, and capital gains are exempt from taxes. (10 marks)

a. What is the after-tax return on Firm B?

b. If Firm A opts to pay a dividend of $20 per share in one year, what is the after-tax return on Firm A?

c. Given that dividends will reduce firm value proportionally, what is the share price of Firm A’s stock if it pays a dividend of $20 in one year?

 

May 29 2021 View more View Less

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