Question: Universal Windmill Company UWC currently has assets worth 50 million
Universal Windmill Company (UWC) currently has assets worth $50 million and a required return of 10% on its 2 million shares outstanding. The firm has an opportunity to invest in (minimally) positive NPV projects that will cost $5 million. UWC needs to determine whether 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. What happens if a personal income tax of 15% on dividends (but not capital gains) is introduced into the model?
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