Concept explainers
a)
To identify: The marginal investors that determine the prices of the stocks.
a)
Explanation of Solution
The marginal investors who determine the prices of the stocks are institutions.
b)
To determine: The prices of the low-, medium-, and high-payout stocks.
b)
Explanation of Solution
Computation of price of the low-, medium-, and high-payout stocks is as follows:
Therefore, the price of low-, medium-, and high-payout stock is $166.67, $83.333, and $250 respectively.
c)
To determine: The after-tax returns of the three types of stock for each investor group.
c)
Explanation of Solution
The institution after-tax rate of return is 12% for each type of stock and the individual’s after-tax returns are as follows:
Therefore, the individuals after-tax rate of return of low-, medium-, and high-payout stock is 9.15%, 8.10%, and 6% respectively.
For corporations, after-tax rate of return is as follows:
Therefore, the corporations after-tax rate of return of low-, medium-, and high-payout stock is 8.70%, 9.60%, and 11.40% respectively.
d)
To determine: The dollar amounts of the three types of stock held by each investor group.
d)
Explanation of Solution
Following table shows the dollar amounts of the three types of stock held by each investor group:
Low payout | Medium payout | High payout | |
Individuals | $80 billion | ||
Corporations | $10 billion | ||
Institutions | $20 billion | $50 billion | $110 billion |
Table no.1
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Chapter 16 Solutions
PRIN.OF CORPORATE FINANCE
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