26. Suppose that there are just three types of investors with the following tax rates:

Individuals Corporations Institutions Dividends 50% 5% 0%

Capital gains 15 35 0 Individuals invest a total of $80 billion in stock and corporations invest $10 billion. The remaining stock is held by the institutions. All three groups simply seek to maximize their after-tax income.

These investors can choose from three types of stock offering the following pretax payouts:

Low Payout Medium Payout High Payout Dividends $5 $5 $30 Capital gains 15 5 0 These payoffs are expected to persist in perpetuity. The low-payout stocks have a total market value of $100 billion, the medium-payout stocks have a value of $50 billion, and the high-payout stocks have a value of $120 billion.

a. Who are the marginal investors that determine the prices of the stocks?

b. Suppose that this marginal group of investors requires a 12% after-tax return. What are the prices of the low-, medium-, and high-payout stocks?

c. Calculate the after-tax returns of the three types of stock for each investor group.

d. What are the dollar amounts of the three types of stock held by each investor group?