1. 13.

Expected Return, Dividends and Taxes [LO 17.2] The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 per cent.

Suppose the capital gains tax rate is zero, whereas the average income tax rate is 30 per cent. Gecko has an expected earnings growth rate of 12 per cent annually, and its share price is expected to grow at this same rate. If the after-tax expected returns on the two shares are equal

(because they are in the same risk class), what is the pretax required return on Gordon’s shares?