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Swelter Manufacturing Company (SMC) currently has assets of $200 million and a required return of 10% on

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Swelter Manufacturing Company (SMC) currently has assets of $200 million and a required return of 10% on its 10 million shares outstanding. The firm has an opportunity to invest in minimally positive NPV projects that will cost $20 million, and is trying to determine if it should withhold this amount from dividends payable to finance the investments or pay out the dividends and issue new shares to finance the investments. Show that the decision is irrelevant in a world of perfect and frictionless markets. How is the result affected if a personal income tax of 15% is introduced into the model?

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There are currently 10 million SMC shares outstanding with a market price of 2000share 200 million assets 10 million shares If the company retains its ...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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