Question

1.If Consolidated Power is priced at $50.00 with dividend, and its price falls to $46.50 when a dividend of $5.00 is paid, what is the implied marginal rate of personal taxes for its stockholders? Assume that the tax on capital gains is 40% of the personal income tax.

2. You are comparing the dividend policies of three dividend-paying utilities. You have collected the following information on the ex-dividend behavior of these firms. NE Gas SE Bell Western Electric Price before 50 70 100 Price after 48 67 95 Dividends/share 4 4 5 If you were a tax-exempt investor, which company would you use to make “dividend arbitrage” profits? How would you go about doing so?

3. Southern Rail has just declared a dividend of $1. The average investor in Southern Rail faces an ordinary tax rate of 50%. Although the capital gains rate is also 50%, it is believed that the investor gets the advantage of deferring this tax until future years (the effective capital gains rate will therefore be 50% discounted back to the present). If the price of the stock before the ex-dividend day is $10 and it drops to $9.20 by the end of the ex-dividend day, how many years is the average investor deferring capital gains taxes? (Assume that the opportunity cost used by the investor in evaluating future cash flows is 10%.)

4. LMN Corporation, a real estate company, is planning to pay a dividend of $0.50 per share. Most of the investors in LMN are other corporations that pay 40% of their ordinary income and 28% of their capital gains as taxes. However, they are allowed to exempt 85% of the dividends they receive from taxes. If the shares are selling at $10 per share, how much would you expect the stock price to drop on the ex-dividend day?

9. WeeMart, a retailer of children’s clothes, announces a cut in dividends following a year in which both revenues and earnings dropped significantly. How would you expect its stock price to react? Explain.

Chapter 11: End of chapter problems 3, 4, 5, 12, 13

1. Lube Oil, a chain of automobile service stations, reports net income of $100 million after depreciation of $50 million. The firm has capital expenditures of $80 million, and the noncash working capital increased from $25 to $40 million. Estimate the firm’s FCFE, assuming that the firm is all equity financed.

2. Lube Oil, in Question 3, paid a dividend of $20 million and bought back $25 million in stock. Estimate how much the cash balance of the firm changed during the year.

How would your answers to the last two questions change if you were told that Lube Oil started the year with $120 million in debt and ended the year with $135 million?

GL Corporation, a retail firm, is making a decision on how much it should pay out to its stockholders. It has $100 million in investible funds. The following information is provided about the firm: •It has 100 million shares outstanding, each share selling for $15. The beta of the stock is 1.25 and the risk-free rate is 8%. The expected return on the market is 16%. •The firm has $500 million of debt outstanding. The marginal interest rate on the debt is 12%. •The corporate tax rate is 50%. •The firm has the following investment projects: Project Investment Requirement ($) After-Tax Return on Capital (%) A 15 million 27 B 10 million 20 C 25 million 16 D 20 million 14 E 30 million 12 The firm plans to finance all its investment needs at its current debt ratio. a. Should the company return money to its stockholders? b. If so, how much should be returned to stockholders?

13. InTech, a computer software firm that has never paid dividends before, is considering whether it should start doing so. This firm has a cost of equity of 22% and a cost of debt of 10% (the tax rate is 40%). The firm has $100 million in debt outstanding and 50 million shares outstanding, selling for $10 per share. The firm currently has net income of $90 million and depreciation charges of $10 million. It also has the following projects available: Project Initial Investment ($) Annual EBIT ($) Salvage ($) Lifetime (year) Depreciation ($) 1 10 million 1 million 5 million 5 2.5 million 2 40 million 5 million 1 million 10 10 million 3 50 million 5 million 1 million 10 10 million The firm plans to finances its future capital investment needs using a 20% debt to capital ratio. a. Which of these projects should the firm accept? b. How much (if any) should the firm pay out as dividends?

Answer 1

You have asked so many unrelated questions. I will address the first one.

Please post the balance unrelated questions separately and one by one.

1.If Consolidated Power is priced at $50.00 with dividend, and its price falls to $46.50 when a dividend of $5.00 is paid, what is the implied marginal rate of personal taxes for its stockholders? Assume that the tax on capital gains is 40% of the personal income tax.

Recall the famous equation connecting the given information:

(Price before dividend - Price after dividend) / Dividend = (1 - T_P) / (1 - T_CG) where T_P = Personal income tax rate and T_CG = Capital gain tax rate

In this question, T_CG = 40% x T_P = 0.4T_P

Hence, (50 - 46.50) / 5 = (1 - T_P) / (1 - 0.4T_P)

Hence, 0.70 = (1 - T_P) / (1 - 0.4T_P)

Hence, T_P = (1 - 0.70)/(1 - 0.28) = 41.67%

Hence, the implied marginal rate of personal taxes for stockholders = T_P = 41.67%

Please post the balance questions as separate questions.