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Suppose that Firm D and Firm G both generate the same after-tax return of 20%. Shares of firm G currently trade at $10 per share. Firm G does not pay a dividend. Firm D pays a dividend of $1.50 per share in one year. Both firms are identical except for their payout policies. Capital gains are taxed at 15%, and dividends are taxed at 25%. Assume that you can apply capital losses against future capital gains.

a) Calculate the price of firm G in one year. Explain your reasoning.

Already have the price will be $11.70 in one year

b) Calculate the before-tax and after-tax dollar return to owning firm G for one year.

Have the dollar return as $1.70 (11.7-10)

c) Calculate the before-tax and after-tax percentage return to owning firm G for one year.

Percentage return is 20% (pre-tax) and 17% (after-tax)

d) Calculate the price of firm D in one year.

e) Calculate the price of firm D today.

f) Calculate the before-tax and after-tax dollar return to owning firm D for one year.

g) Calculate the before-tax and after-tax percentage return to owning firm D for one year.

h) What is the before-tax discount rate you used to value the shares in Firm G and D? By how much larger is it than the after-tax return of 20%? Explain why it is larger.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92823202

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