An all$-$equity company has the following year$-$end market value balance sheet:

Excess Cash $$200,000$

Debt $$0$

Other Assets $$800,000$

Equity $$1,000,000(10,000$ shares at $$100$ per share$)$

The firm is considering the following alternative uses of its excess cash:

Alternative $1$: Payout cash dividends

Alternative $2$: Repurchase its own stock

What will be the share price if the company chooses Alternative $1?$

What will be the share price if the company chooses Alternative $2?$

Suppose you own $600$ shares of the company's stock, and the company chooses Alternative $2.$ What will you do to create a "home$-$made dividend" equal to the dividend amount you would have received under Alternative $1?$

  

 

Suppose you create the home$-$made dividend in Question $18.$ How much difference will there be in the tax you will pay, compared to the tax you would have paid if the company had chosen Alternative $1?$

Assume that you had in the past purchased the shares you own at $$25$ per share; the dividends received are taxed at $30\%$ and the capital gains are taxed at $20\%.$

Maive firm's capital structure has a debt ratio of and equity ratio of $.$ The firm's earnings at this year$-$end are $$24,000.$ The firm follows a residual dividend policy.

What is the maximum capital budget the firm can have without raising external equity?

  

Answer rating: 100% (QA)

Lets address each part of the question 1 Share Price under Alternative 1 Dividends Total equity befo... View the full answer