The Blue Box Corporation (BBC) commits to paying a constant dividend of $5 per share each...

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The Blue Box Corporation (BBC) commits to paying a constant dividend of $5 per share each year, in perpetuity. Suppose that another investment with the same level of systematic risk as BBC's shares has an expected return of 15%. a. The personal income tax rate is 0%. What is the share price of BBC? b. Now assume that all investors must pay a 20% tax on dividends. What is the share price of BBC in this case? c. The capital gains tax is 10%. BBC's management makes a surprise announcement that BBC will no longer pay any dividends. Instead, BBC will use the same amount of cash it used to pay as dividends to repurchase stock (assume shares never run out). What is the price of a share of BBC now? The Blue Box Corporation (BBC) commits to paying a constant dividend of $5 per share each year, in perpetuity. Suppose that another investment with the same level of systematic risk as BBC's shares has an expected return of 15%. a. The personal income tax rate is 0%. What is the share price of BBC? b. Now assume that all investors must pay a 20% tax on dividends. What is the share price of BBC in this case? c. The capital gains tax is 10%. BBC's management makes a surprise announcement that BBC will no longer pay any dividends. Instead, BBC will use the same amount of cash it used to pay as dividends to repurchase stock (assume shares never run out). What is the price of a share of BBC now?

Answer rating: 100% (QA)

a The share price of BBC would be 50 This can be calculated using the Gordon Growth Model which stat... View the full answer