Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Investors require an after-tax rate of return of 10% on their stock Investments. Assume that the tax rate on dividends is 30% while capital gains

image text in transcribed

Investors require an after-tax rate of return of 10% on their stock Investments. Assume that the tax rate on dividends is 30% while capital gains escape taxation. A firm will pay a $2 per share dividend 1 year from now, after which the firm's stock is expected to sell at a price of $35. a. Find the current price of the stock. (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Current price b. Find the expected before-tax rate of return for a 1-year holding period. (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Before-tax rate of return c. Now suppose that the dividend will be $6 per share. If the expected after-tax rate of return is still 10% and Investors still expect the stock to sell at $35 In 1 year, at what price must the stock now sell? (Do not round Intermediate calculations. Round your answer to 2 decimal places.) Price d. What is the before-tax rate of return? (Do not round Intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Before-tax rate of return 9%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered 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

Students also viewed these Finance questions