Question

A spanish mnc needs to raise eur5 million in equity. it can issue common shares that pay taxable dividends and bearer shares that pay the same dividend. the tax rate on taxable dividends is 5.50%. in addition, the mnc incurs a cost of 5.50% of the proceeds to issue common shares. if the cost to issue bearer shares is of the proceeds, then the mnc is indifferent between either type of share.

a. 11%
b. 10.5%
c. 10%

Answer 1

To make a Spanish MNC indifferent between issuing common shares and bearer shares, both with the same dividend, the cost to issue bearer shares would need to be 11%. This is calculated by equating the net proceeds after considering taxes and issuance costs for common shares to the net proceeds from bearer shares after only the issuance cost.

Step-by-step explanation:

The question is about calculating the cost to issue bearer shares at which a Spanish multinational corporation (MNC) would be indifferent between issuing common shares that pay a taxable dividend and issuing bearer shares that pay the same dividend.

We know the tax rate on taxable dividends is 5.50%, and the cost to issue common shares is also 5.50% of the proceeds. The MNC wants to raise EUR 5 million in equity.

To find the cost of issuing bearer shares that makes the MNC indifferent, we have to equate the net proceeds from both options. With common shares, after deducting both the dividend tax and the cost of issuance, the net proceeds would be (100% - 5.5% - 5.5%) of EUR 5 million.

For bearer shares, there is no tax on dividends, so we only deduct the cost of issuance; let's call this cost 'x'%. The equation is (100% - 5.5% - 5.5%) = (100% - x%). Solving for x gives us a cost of 11% for bearer shares to make the MNC indifferent between the two options.