Problem Solving $(30$ marks$)$:

Consider the following information about two firms, A and B :

The stock of firms A and $B$ are equally risky.

Dividends are taxed at $40\%,$ capital gains at $20\%.$

Investors demand an expected after$-$tax rate of return of $10\%.$

Investors expect A to be worth $$112\mathrm{.}50$ next year and B to be worth $$102\mathrm{.}50.$ However,

a $$10$ dividend is also widely forecasted for firm B so the total pre$-$tax profit is the same:

$$112\mathrm{.}50.$

Show that logically Firm B must sell at a lower price today. Explain or comment on your solution as you

proceed step$-$by$-$step. Finally, provide an intuitive conclusion, i$.$e$.,$ one that could be easily understood

by a non$-$finance reader.