A firm may pay 100€ as dividends to their shareholders. The firm may also reinvest this amount in a project generating 20% of return before corporate taxes. Corporate taxes are 25%. Personal taxes are 20%. Summarizing, the firm has two alternatives;

a) pay 100€ to shareholders as dividends today

b) pay as dividends the cash flow generated by the project in one year.


Shareholders may invest in a portfolio of assets with the same risk as the previous project. 

Compute the return of the previous portfolio that leaves investors indifferent between alternatives a (dividend today) and b (dividend next year).

Answer rating: 100% (QA)

To determine the return of the portfolio that would leave investors indifferent between receiving di... View the full answer