Question
Consider equally risky, all-equity financed firms G and D. Both firms are currently trading at $50 per share. Firm G pays no dividends, but firm
Consider equally risky, all-equity financed firms G and D. Both firms are currently trading at $50 per share. Firm G pays no dividends, but firm D pays all its earnings as dividends. In a year from today, the stock of firm G is expected to be at $65 per share. Firm D is expected to pay a $15 dividend per share at the year-end and its stock price at the year-end is expected to be $50 per share. Capital gains are taxed at half the 40% regular income tax rate, but the dividend income is taxed at 30%.
Required At what share price should the stock of firm D be trading to-day in a competitive stock market? Show calculations to support your answer.
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