Question
Consider a firm will pay a dividend of $2 per share forever (0% dividend growth). Investors pay a 20% tax on dividends but no capital
Consider a firm will pay a dividend of $2 per share forever (0% dividend growth). Investors pay a 20% tax on dividends but no capital gains tax. The firm's return of equity is 12%.
(a)What is the price of the firm's stock?
(b)If the firm switches from paying dividends to using the same amount of cash to repurchase shares, what is the price of the firm's stock immediately after this announcement?
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Basic Finance An Introduction to Financial Institutions Investments and Management
Authors: Herbert B. Mayo
10th edition
1111820635, 978-1111820633
