Show decision is irrelevant in world of frictionless market

Reference no: EM131316989

Universal Windmill Company (UWC) currently has assets worth $50 million and a required return of 10 percent on its 2 million shares outstanding.

The firm has an opportunity to invest in (minimally) positive-NPV projects that will cost $5 million. UWC needs to determine whether it should withhold this amount from dividends payable to finance the investments or pay out the dividends and issue new shares to finance the investments.

Show that the decision is irrelevant in a world of frictionless markets. What happens if a personal income tax of 15 percent on dividends (but not capital gains) is introduced into the model?

Reference no: EM131316989

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