Question

8. If dividends are taxed more heavily than capital gains, investors: a) Should pay more for stocks with low dividend yields b) Should pay more for stocks with high dividend yields c) Should pay the same for stocks regardless of the dividend yields d) Cannot be predicted as stock prices fluctuate randomly 9. Firm Alpha has a value of £300 million and Firm Beta has a value of £200 million. Merging the two companies would allow cost savings with a present value of £50 million. If Firm Alpha purchases Firm Beta for £220 million, how much do the shareholders of firm Alpha gain from this merger: a) £20 million b) £30 million c) £40 million d) £50 million

Answer 1

Q8: a

Since dividends will be taxed at a higher rate, investors will value low dividend yield stocks rather than higher ones. Hence other options are incorrect.

Q9: b

Gain from merger = PV of cash flows -(loss on merging assets)

= 50-(220-200)=30 million