A company's shares trade at a P/E ratio of 10 and have a consistent growth in earnings of 4.5%. The company has a 30% payout ratio and dividends are paid at the end of each year. In December the company declared its dividend based on an EPS of $6.50. When the markets opened in January and investor purchased 100 shares. The investor's marginal tax rate is 42%. The dividend tax rate is 36%. Capital gains tax applies. If the entire investment is sold at the end of the year and the investor requires a 10% return, what is the after-tax net present value of her investment?

Question

Quizplus · Accepted Answer

The investor's after-tax dividend is calculated by multiplying the dividend per share by (1 - dividend tax rate). The capital gain is calculated by subtracting the purchase price from the selling price, and then applying the capital gains tax. The NPV is calculated by discounting the after-tax cash flows at the required rate of return.

A Company's Shares Trade at a P/E Ratio of 10