Do-Re-Mi Corporation makes musical instruments and experiences only moderate growth. The company has just paid a dividend and is contemplating a dividend of $1.35 per share 1 year hence. The present market price per share is

$15, and stock price appreciation of 5 percent per annum is expected.

a. (1) If the required return on equity were 14 percent and we lived in a no-tax world, what would be the market price per share at the end of the year using the Modigliani-Miller model? (2) What would be the price if no dividend were paid?

b. Jose Hernandez, a stockholder, is in a 30 percent tax bracket for ordinary income, but his effective tax rate for capital gains is 20 percent. If he were to hold the stock 1 year, what would be his expected after-tax return in dollars for each share held?