(20 marks)

a) Is the following statement true of false? Explain.

According to the Clientele Effect, investors like high dividends because a fimr can boost its share price by having a higher dividend payout ratio. (5 marks)

b) B2B company has $1,080 million in common stock outstanding. Its unlevered cost of equity is 10%. Moreover, B2B also has $540 million in 5% coupon rate bond outstanding. The bonds are selling at par. If the corporate tax rate is 35%.

i) Calculate the weighted average cost of capital (WACC) of B2B. (6 marks)

ii) B2b has decided to issue $270 million in common stock and use the proceeds to buy back $270 million in its bond. According to the M&M proposition with tax, what are the new B2B's WACC and new cost of equity? (6 marks)

iii) B2B has just announced a 20% stock dividend when the market value of its common stock is $108 per share. Calculate the new market price of B2B's shares after the stock dividend. (3 marks)