The equity dividend rate: a. does not consider financing structures. b. does not consider the effect of income taxes on the value of the investment. c. is the only method which considers future cash flows. d. all of the above.

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1 January, 03:14

The equity dividend rate: a. does not consider financing structures. b. does not consider the effect of income taxes on the value of the investment. c. is the only method which considers future cash flows. d. all of the above.

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Tomas Clay · Answer 1

The correct option is B, does not consider the effect of income taxes

Explanation:

Option is wrong because in levered company (a company that uses both equity and debt finances), shareholders usually require a higher rate of return than debt cost of capital to compensate for taking higher risk compared to debt-holders. The higher risk is having to forgo dividends payment when profits are not enough to payment interest on debt as well as pay dividends to equity shareholders, hence equity dividend rate considers financing structures.

Bond investment also considers future cash flows in valuing a bond, that in determining the price a bond should be issued.

Ultimately, option B is correct because equity investment is not tax deductible unlike debt issuance.