______________________________________________ PRIVATE EQUITY in VS .NET

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dividends The cash dividend preferring investors should place their funds elsewhere The strategy for firms with private equity capital is to avoid cash dividends and have the investors benefit from future capital gains A board of directors acting in the interests of the stockholders of a public corporation sets the dividend policy of a firm to please many different types of investors The ability of an investor to defer income taxes as a result of the company's retaining earnings is an important consideration In addition, the distinction between ordinary income and capital gains for purposes of income taxation by the federal government accentuates the importance of the investors knowing the dividend policy of the firms whose stock they are considering purchasing or have already purchased Some investors face zero or low tax rates and have different objectives from the high tax rate investors This means that a corporation (and its board) has a responsibility to announce its dividend policy, and attempt to be consistent in its policy, changing only when its economic situation changes significantly Private equity simplifies the task of a firm's board of directors since the equity investors are likely to have similar investment objectives There is value added since the board of directors does not have to follow a distribution policy aimed at pleasing the average investor, given a narrow range of preferences among the private equity investors QUESTIONS AND PROBLEMS _______________ la Assume an investor can earn 12 before investor tax and 07248 after investor tax The tax rate on ordinary income is 396 If the corporation pays a $100 dividend, after 20 years the investor will have how much 1b If the corporation retains the $100 and earns 12 per year for 20 years, the investor will have how much Assume a 20 capital gains tax rate 2 What IRR does the investor earn with retention compared to an immediate cash dividend
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A Changed Dividend Policy_______________________________________45
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3a What is the value of a firm paying $100 dividend taxed at 396, with zero growth and a 07248 discount rate 3b Assume the $100 per year is reinvested for 20 years and the basic firm value of $83333 is present at time 20
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The firm's value at time 20 is $8,03857 Assume the $7,20524 is sold at time 20 (assume a zero tax basis) Tax = 2(7,20524) = $1,44105 What is the present value of this strategy
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second way finance strategy combined with private equity Aadds value is thatsubstituting debt for equity The CEO of the typby ical large public firm is well paid, independent of the firm's performance The CEO's financial rewards are likely to go up if the firm does well, but there are not likely to be significant reductions in pay if the firm does not reach its operating targets If the CEO does badly enough, there is the possibility that the board of directors will fire the CEO The CEO does not want to increase the variance of the outcomes for the stockholders larger than necessary Additions to debt in substitution for stock always increase the variance of the stockholders' returns By keeping the amount of debt low, the CEO of a highly profitable firm is able to increase the likelihood of keeping a stream of high income For most managers the present value of their salaries is larger than their value increment from substituting debt for equity Now consider private equity where management owns a significant percentage of the common stock The objectives of gaining control and increasing firm value are now more competitive with the likelihood of the CEO's retaining the position and salary The incentive to substitute debt for equity is larger than when the CEO was just an employee
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There are many reasons why the use of debt might be desirable but we will concentrate on three The first is that the nominal cost of
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