a) David Corporation has assets with a market value of $600 million, $80 million of which are cash. It has debt of $250
Posted: Thu May 19, 2022 7:14 am
a) David Corporation has assets with a market value of $600
million, $80 million of which are cash. It has debt of $250
million, and 20 million shares outstanding. Assume perfect capital
markets.
(i) The current stock price is at $26. Do you agree? Explain it
with calculation.
(ii) If David Corporation spends $70 million as a share
repurchase, the share price would be increased because the number
of shares would be decreased. Do you agree? Explain it with
calculation (Calculate the share price after the share
repurchase).
(iii) If David Corporation distributes $70 million as cash
dividend, then what is the ExDividend Price per share of the
stock?
b) Assume that the dividend tax rate is 38%. The stock price of
Ginny Corporation closed today at $30. Ginny Corporation would pay
$4 special dividend per share, and tomorrow is the ex-dividend
date.
(i) Assume that there is no tax on capital gains. Calculate the
expected stock price on tomorrow morning.
(ii) Assume that the tax rate on capital gains is 34%. Calculate
the effective dividend tax rate.
(iii) Assume that the tax rate on capital gains is 34%.
Calculate the expected stock price on tomorrow morning.
million, $80 million of which are cash. It has debt of $250
million, and 20 million shares outstanding. Assume perfect capital
markets.
(i) The current stock price is at $26. Do you agree? Explain it
with calculation.
(ii) If David Corporation spends $70 million as a share
repurchase, the share price would be increased because the number
of shares would be decreased. Do you agree? Explain it with
calculation (Calculate the share price after the share
repurchase).
(iii) If David Corporation distributes $70 million as cash
dividend, then what is the ExDividend Price per share of the
stock?
b) Assume that the dividend tax rate is 38%. The stock price of
Ginny Corporation closed today at $30. Ginny Corporation would pay
$4 special dividend per share, and tomorrow is the ex-dividend
date.
(i) Assume that there is no tax on capital gains. Calculate the
expected stock price on tomorrow morning.
(ii) Assume that the tax rate on capital gains is 34%. Calculate
the effective dividend tax rate.
(iii) Assume that the tax rate on capital gains is 34%.
Calculate the expected stock price on tomorrow morning.