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Finance: Dividends and Capital Structure
Find the value of a firm that can generate 300 FCF per year forever. The WACC is 9%.
How might the firm's level of business risk affect the optimal capital structure?
If you believed in the bird-in-the-hand dividend theory, would you pay more dividends or fewer? Why?
ABC Company has a cost of equity of 10%. EBIT is 100. They currently have no debt. Find the new cost of equity if they changed to using a capital structure that used 40% debt and 60% equity. The interest rate on the debt is 4% and the tax rate is 35%.
How can taxes affect the firm's optimal capital structure?
Timco needs to invest 400 in new assets. They use a capital structure that is 40% debt and 60% equity. Next years net income is expected to be 500. Find the amount for the residual dividend.
Timco has EBIT of 100. This should continue forever. The tax rate is 40%. The cost of equity is 12%. Find the firm's value and the WACC if Timco uses no debt.
In general, in what two ways might a financial decision affect firm value? I am not asking for specific examples, just the possible way this decision might have an influence.
Why is an increase in dividends considered evidence that a firm's managers are not taking advantage of the agency relationship?
Provide support for the following statement: "Dividends don't matter".