Question: Swelter Manufacturing Company SMC currently has assets of 200 million
Swelter Manufacturing Company (SMC) currently has assets of $200 million and a required return of 10% on its 10 million shares outstanding. The firm has an opportunity to invest in minimally positive NPV projects that will cost $20 million, and is trying to determine if it should withhold this amount from dividends payable to finance the investments or pay out the dividends and issue new shares to finance the investments. Show that the decision is irrelevant in a world of perfect and frictionless markets. How is the result affected if a personal income tax of 15% is introduced into the model?
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