Assign4 - Kevin Chang Finacial Econ HW 4 9(a.) NI = $80,000...

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Kevin Chang Finacial Econ HW 4 9(a.) NI = $80,000 – .08($300,000) NI = $56,000 The total dividends received by the shareholder will be: Dividends received = $56,000($30,000/$300,000) Dividends received = $5,600 So the expected rate of return for Rico: R = $5,600/$30,000 R = .1867 or 18.67% (b.) To get the same cash flows for both company, the shareholder needs to match the capital structure of ABC. This will create an interest cash flow of: Interest cash flow = .08(–$30,000) Interest cash flow = –$2,400 The total dividends received by the shareholder will be: Dividends received = $80,000($60,000/$600,000) Dividends received = $8,000 The total cash flow for the shareholder will be: Total cash flow = $8000– 2,400 Total cash flow = $5,600 The shareholders return: R = $5,600/$30,000 R = .1867 or 18.67% (c.) ABC is an all equity company, so: RE = RA = $80,000/$600,000 RE = .1333 or 13.33%
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Assign4 - Kevin Chang Finacial Econ HW 4 9(a.) NI = $80,000...

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