Question

A firm’s value depends on its expected free cash flow and its cost of capital. Distributions...

A firm’s value depends on its expected free cash flow and its cost of capital. Distributions made in the form of dividends or stock repurchases impact the firm’s value and the investors in different ways.

Consider the scenario, and answer the questions that follow:

Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? In addition, is the stock more likely to have a high or low dividend yield?

A technology stock that has a high dividend yield

A utility stock that has a low dividend yield

A technology stock that has a low dividend yield

A utility stock that has a high dividend yield

Which of these statements is true?

Taxes on dividends are paid in the year that they are received.

Taxes on dividends are paid when the stock is sold.

Consequently, the tax code encourages many individual investors to prefer.

Capital Gains

Dividends

Another firm, called Purity Power & Water, an established public utility company, has been paying dividends for the past 20 years. This year Purity also announced that it will increase its dividends by 10%. Which class of investors is more likely to be pleased by Purity’s dividend announcement?

Investors with high tax rates who don’t depend on current dividend income for living expenses

Investors with low tax rates who depend on current dividend income for living expenses

A firm’s ______ dividend policy determines its current clientele of investors.

Future

Past

Homework Answers

Answer #1

1. Technology stock with a low dividend yield. Similar to this would be the case of apple, it also has a lot of cash and very less investment opportunity and the dividend is less because they need to keep excess cash for development of technology.

2. Taxes are paid on the dividend in the year they are received.

3. Individual prefer dividends as they do not have to pay taxes on them. The company pays the tax on dividends.

4. Investors with low tax rates who depend on current dividend income for living expenses will be pleased if the company increases dividends

5. Past Dividend policy determines the current clientele of investors.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Ignoring possible tax effects and signaling costs, the total value of a firm’s equity remains the...
Ignoring possible tax effects and signaling costs, the total value of a firm’s equity remains the same irrespective of how the firm distributes its residual earnings—dividends or stock repurchases. Each distribution method has certain advantages and disadvantages. Based on your understanding of dividends and stock repurchases, select the best terms to go with the statements. Excess cash or a desire to recapitalize usually leads management to      Management tries to maintain consistent, regular dividend distributions to encourage any dividend cuts...
At current tax rates, which of the following investors are most likely to hold a stock...
At current tax rates, which of the following investors are most likely to hold a stock that has a high dividend yield? Individual investors Pension funds Mutual funds Corporations
QUESTION 21 1. One implication of the tradeoff theories of capital structure decision is that firms...
QUESTION 21 1. One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at high rates should carry more debt than firms in lower tax brackets. True False 1 points    QUESTION 22 1. One implication of the tradeoff theories of capital structure decision is that risky firms, as measures by the variability of asset returns, ought to borrow more, other things equal. True False QUESTION 25 1. One would normally...
A firm current free cash flow is $109,237. The company is expected to grow at 15.5%...
A firm current free cash flow is $109,237. The company is expected to grow at 15.5% in the coming year. The financing of the company comes from the 10,000 bonds which currently traded at $879.625 and preferred stock of 50,000 shares with a market price of $42 each. The current EPS of the company is $1.89 with 750,000 common shares and has recently paid a dividend of $0.65 per share. The firm’s common stock is currently trading for $45 per...
Given the following data: • The firm’s marginal tax rate is 21%. • The current price...
Given the following data: • The firm’s marginal tax rate is 21%. • The current price of the corporation’s 10% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,011.55. The company does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. • The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $110.12. The company would incur flotation costs of...
The value of a share of common stock depends on the cash flows it is expected...
The value of a share of common stock depends on the cash flows it is expected to provide, and those flows consist of the dividends the investor receives each year while holding the stock and the price the investor receives when the stock is sold. The final price includes the original price paid plus an expected capital gain. The actions of the marginal investor determine the equilibrium stock price. Market equilibrium occurs when the stock's price is -Select-less thanequal togreater...
1) A firm with return on equity (ROE) less than its cost of capital: A. would...
1) A firm with return on equity (ROE) less than its cost of capital: A. would increase firm value by retaining all its earnings for growth of the firm B. should pay out earnings to investors as dividends rather than retain earnings for growth C. will generally have relatively high P/E ratios D. all of the above 2) A company recently paid out a $4 per share dividend on their stock. Dividends are projected to grow at a constant rate...
After completing its capital spending for the year, Carlson Manufacturing has $1,200 extra cash. Carlson’s managers...
After completing its capital spending for the year, Carlson Manufacturing has $1,200 extra cash. Carlson’s managers must choose between investing the cash in Treasury bonds that yield 2 percent or paying the cash out to investors who would invest in the bonds themselves.    a. If the corporate tax rate is 22 percent, what personal tax rate would make the investors equally willing to receive the dividend or to let Carlson invest the money? (Do not round intermediate calculations and...
Question 80 During the coming year, Gold & Gold wants to increase its free cash flow...
Question 80 During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher stock price. The CFO has made these projections for the upcoming year: ∙ EBIT is projected to equal $852 million. ∙ Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. ∙ The tax rate is 25%. ∙ There will be...
5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D0). It plans to maintain the...
5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D0). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (Ke) is 12 percent, what is the price of the common stock?        6.   The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt if the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT