National Co. make these assumptions for valuation purposes: a. The firm consists of a single asset that
Question:
National Co. make these assumptions for valuation purposes:
a. The firm consists of a single asset that will generate pretax net cash flows of P3,000,000 per year forever.
b. The income tax rate is 25%.
c. After making debt service payments and paying taxes, the firm pays dividends to distribute any remaining cash flows to the equity shareholders each year.
d. The equity shareholders finance a portion of the investment in the asset with P60,000,000 of equity capital. (Equity ratio = 6/10 = 60%)
e. The firm finances the remainder of the asset using P40,000,000 of debt capital. (Debt ratio = 40% = 4/10)
f. This amount of debt in the firm’s capital structure does not alter substantially the risk of the firm to the equity investors, so they continue to require a 12% rate of return.
g. The debt is issued at par, and it is less risky than equity; so the debt-holders demand interest of only 7% each year, payable at the end of each year.
h. Interest expense is deductible for income tax purposes
Required: Compute for the dividend amount each year to the shareholders?
Process Dynamics And Control
ISBN: 978-0471000778
2nd Edition
Authors: Dale E. Seborg, Thomas F. Edgar, Duncan A. Mellich