Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I have part A. I need help with part B please. The expected pretax return on three stocks is divided between dividends and capital gains

I have part A. I need help with part B please.

The expected pretax return on three stocks is divided between dividends and capital gains in the following way:

Stock Expected Dividend Expected Capital Gain

A $0 $10

B 5 5

C 10 0

Required: a. If each stock is priced at $145, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains?

b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Algorithmic Finance A Companion To Data Science

Authors: Christopher Hian-ann Ting

1st Edition

9811238308, 978-9811238307

More Books

Students also viewed these Finance questions

Question

2. What is the meaning and definition of Banking?

Answered: 1 week ago

Question

3.What are the Importance / Role of Bank in Business?

Answered: 1 week ago

Question

What are some of the hiring standards to avoid?

Answered: 1 week ago

Question

What are some metrics for evaluating recruitment and selection?

Answered: 1 week ago