How are the d/v and e/v ratios calculated for question 4 ?

What is the share price of HNH stock? Since investors pay 20% tax on dividends, the dividend is $2.00(1-0.2) = $1.60. Therefore, the share price today is P = $1.60/0.12 = 13.33. Assume that management makes a surprise announcement that HNH will no longer dividends but use the cash to repurchase stock instead. What is the price of a share stock now? The share price will react on announcement day. Income generated by HNH Corporation will now be distributed in the form in the form of stock repurchase instead of dividend. In this case, shareholders' income will be in the form of capital gains, which is not taxed. The new share price will be P = $2/0.12 = $16.67 Class 4 Gestion Bernaise has 10 million shares outstanding, now trading pound70 per share. The firm has estimated the expected rate of return to shareholders at about 15 percent. It has also issued pound200 million long-term bonds at an interest rate of 8 percent. It pays tax at a marginal rate of 35.4 percent. a. What is the company's after-tax WACC? b. How much higher would WACC be if the company used no debt at all? (For this problem you can assume that the firm's overall beta is not affected by its capital structure or by interest tax shields). a. After-tax WACC = r_D (1 - T_C) D/V + r_E E/V = 0.08 times (1 - 0.354) times 0.222 + (0.15 times 0.778) = 0.1282 = 12.82% b. The after-tax WACC would increase to the extent of the loss of the tax deductibility of the interest on debt. Therefore, the after-tax WACC would equal the asset return or unlevered equity return (r_A): r_A = WACC = r_D D/V + e_E E/V = (0.08 times 0.222) + (0.15 times 0.778) = 0.1345 = 13.45%