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Old 10-18-2017, 03:55 PM
sruser sruser is offline
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Join Date: Oct 2017
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Default Question about after-tax CF

Hi,

I have been trying to solve an assignment but cannot seem to get the right answer on the problems containing cash flows so if anyone could help me it would be greatly appreciated

The assignment:

A year ago you purchased the ABC stock for 60. The stock is now selling for 80. The firm has just announced that it will distribute a special dividend of 10. You are considering whether or not you should sell the stock now before it goes ex-dividend(trading strategy 1), or alternatively, wait to capture the dividend and then sell the stock immediately afterward (trading strategy 2).

Problem 1:

If your capital gains tax rate equals your dividend tax rate, what ex-dividend price per share makes you indifferent between the two trading strategies?

- This one I got right and calculated to 70

Problem 2

Assume now that ABC's corporate tax rate is 28%, while your capital gains and dividend tax rates equal 10% and 20%, respectively. What ex-dividend price per share will now make you indifferent between the two trading strategies?

This one I got right and calculated to 71,11

Problem 3

For the ex-dividend price per share calculated in problem 2, what is the resulting net cash flow from pursuing trading strategy 2? State your answer rounded off to two decimal points.

Problem 4

Given the information provided above, what is the resulting net cash flow from pursuing trading strategy 1? State your answer rounded off to two decimal points.



Having completing its capital spending for the year, Newcastle Ayl has 1,000 extra cash. Two cash distribution strategies are available:

(1) Retain the cash for the purpose of investing in a Treasury bonds yielding 8% with the annual returns subsequently distributed to investors as dividend, or

(2) Paying the cash out to investors who would invest the bonds themselves.

Problem5.

Assume that Newcastle Ayl's tax rate is 23%(0,23). What would investor tax rate on dividend payments and interest income make investors indifferent betweent the two cash distribution strategies? State the answer as a decimal number rounded off to two point.

- This one I got right as i calculated it to be 0,23.

Problem 6

Assume that Newcastle Ayl's tax rate is 23%(0,23). If investor tax rate on dividend payments and interest income is 20%, what is investors after-tax cash flow if Newcastle Ayl applies cash distribution strategy 2? State your answer rounded off to two decimal points.

Problem 7

Assume that Newcastle Ayl's tax rate is 23%. If the investor tax rate on dividend payments and interest income is 20%, what is investors after-tax cash flow if Newcastle Ayl applies cash distribution strategy 1? State your answer rounded off to two decimal points.
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