Cpa Firm Essay

758 Words Dec 5th, 2015 4 Pages
Problem 17-7 on Ex-dividend Price Based on Chapter 17 Payout Policy
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend. a. What is the ex-dividend price of a share in a perfect capital market?
$250/500 = 0.50
Answer: the ex-dividend price of a share in a perfect capital market is 0.50 b. If the board instead decided to use the cash to do a one-time share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete?
Answer: the price of the share once the repurchase is complete is $15.00 c. In a perfect
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Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends.

Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from trading to capture the dividend?

Answer: If the stock price drops by 80% of the dividend amount, then shareholders are indifferent if t*_d = 20%. From Eq. 17.3, (td – tg)/(1 – tg) = t*, so td = tg + t* (1 – tg) = 36%. Investors who pay a lower tax rate than 36% could gain from a dividend capture strategy.

Problem 23-5 on Preferred Stock Based on Chapter 23 Raising Equity Capital

Three years ago, you founded your own company. You invested $100,000 of your money and received 5 million shares of Series A preferred stock. Since then, your company has been through three additional rounds of financing.

Round | Price ($) | Number of Shares | INVESTMENT | Series B | 0.50 | 1,000,000 | 250,000,000 | Series C | 2.00 | 500,000 | 500,000 | Series D | 4.00 | 500,000 | 2,000,000 | TOTAL | | 7,000,000 | 253,500,000 | a. What is the pre–money valuation for the Series D funding round?
Pre-money valuation = Post Money Valuation – New Investment
Pre-Money Valuation = 28000000-2000000
Pre-Money Valuation = $26,000,000.00

b. What is the post–money valuation

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