Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Braxton Enterprises has made a before-tax profit of $300 million. The firm has no debt and 100 million shares outstanding, with a current market price
Braxton Enterprises has made a before-tax profit of $300 million. The firm has no debt and 100 million shares outstanding, with a current market price of $15 per share. Braxtons board is currently deciding whether to pay out this profit to shareholders through a dividend or a one-time share repurchase.
- If the board chooses to pay a dividend, what is the ex-dividend price of the shares in a perfect capital market with no taxes?
- If the board instead chooses to use the cash to do a one-time share repurchase, in a perfect capital market with no taxes, what is the price of the shares once the repurchase is complete?
- Suppose that the board decides to pay a dividend. Now assume that Braxton Enterprises pays corporate taxes of 30% and the marginal tax rate for shareholders is 40%. What is the after-tax dividend and effective tax rate for shareholders: (i) Under a classical tax system? (ii)Under an imputation system (assuming that the dividend is 70% franked)?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started