Good Values Inc. is all-equity-financed. The total market value of the firm curr
ID: 2788588 • Letter: G
Question
Good Values Inc. is all-equity-financed. The total market value of the firm currently is $150,000, and there are 5,000 shares outstanding. Ignore taxes a. The firm has declared a $6 per share dividend. The stock will go ex-dividend tomorrow. At what price will the stock sell today? Stock price b. At what price will the stock sell tomorrow? Stock price c. Now assume that the tax rate on all dividend income is 40% and the tax rate on capital gains is zero. At what price will the stock sell. taking account of the taxation of dividends? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock priceExplanation / Answer
Answer A) Price at What stock will sell today:-
=Total market value of the firm/No. of shares outstanding
=$150,000/5,000=$30
Answer B) At what price will stock sell tomorrow:-
=$30-$6(dividend declared)
=$24
D)
The repurchase will have no tax implications. Because the repurchase does not create a tax obligation for the shareholders, the value of the firm today is the value of the firm’s assets ($150,000) divided by 5,000 shares, or $30 per share. The firm will repurchase 500 shares for $15,000. After the repurchase, the stock will sell at a price of $135000/4500 = $30 per share.
The price is the same as before the repurchase.
stock price before repurchse = $30 per share
Stock price after Repurchase= $ 30 per share.
F) Repurchases because the larger dividend creates a greater tax burden.
D)
The repurchase will have no tax implications. Because the repurchase does not create a tax obligation for the shareholders, the value of the firm today is the value of the firm’s assets ($150,000) divided by 5,000 shares, or $30 per share. The firm will repurchase 500 shares for $15,000. After the repurchase, the stock will sell at a price of $135000/4500 = $30 per share.
The price is the same as before the repurchase.
stock price before repurchse = $30 per share
Stock price after Repurchase= $ 30 per share.
F) Repurchases because the larger dividend creates a greater tax burden.
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