Problem Solving Questions Problem 1 (12 Marks) Following table presents pre-tax dollar return on three stocks between dividends and capital gain. Each stock is priced at $200 Expected Capital Gain (S) Expected Dividend (S) Stock ABC Stock XYZ Stock LMN 15 15 Part A: What are the expected net returns on each stock to follow three categories of investors? Current tax law suggests that capital gain tax is applied on the 50% of capital gains. Pension Fund: It does not pay tax on either capital gain or dividend income. Canadian Provincial Corporation: It does not may tax on intercompany dividend income. But, it pays tax at a combined federal and provincial rate of 24 percent. Individual investor: Pays a federal marginal tax rate of 30 percent and a provincial marginal tax rate of 15 percent. The gross-up gross-up for dividend tax credits is 20 percent. The federal dividend tax credit is 12 percent of the grossed-up dividend, and the provincial dividend tax credit is 5 percent of grossed-up dividend. There is no grossing-up for capital gain tax. Part B: Which stock will give best return to each investor? Part C: Suppose, next year following changes take place with respect to dividend tax credit Individual investor pays a federal marginal tax rate of 22 percent and a provincial marginal tax rate of 11 percent. The gross-up for dividend tax credits is 20 percent. The federal dividend tax credit is 15 percent of the grossed-up dividend, and the provincial dividend tax credit is 7 percent of grossed-up dividend. There is no grossing-up for capital gain tax. Under the new tax environment, which stock will give best return to each investor? (Show calculation) Problem Solving Questions Problem 1 (12 Marks) Following table presents pre-tax dollar return on three stocks between dividends and capital gain. Each stock is priced at $200 Expected Capital Gain (S) Expected Dividend (S) Stock ABC Stock XYZ Stock LMN 15 15 Part A: What are the expected net returns on each stock to follow three categories of investors? Current tax law suggests that capital gain tax is applied on the 50% of capital gains. Pension Fund: It does not pay tax on either capital gain or dividend income. Canadian Provincial Corporation: It does not may tax on intercompany dividend income. But, it pays tax at a combined federal and provincial rate of 24 percent. Individual investor: Pays a federal marginal tax rate of 30 percent and a provincial marginal tax rate of 15 percent. The gross-up gross-up for dividend tax credits is 20 percent. The federal dividend tax credit is 12 percent of the grossed-up dividend, and the provincial dividend tax credit is 5 percent of grossed-up dividend. There is no grossing-up for capital gain tax. Part B: Which stock will give best return to each investor? Part C: Suppose, next year following changes take place with respect to dividend tax credit Individual investor pays a federal marginal tax rate of 22 percent and a provincial marginal tax rate of 11 percent. The gross-up for dividend tax credits is 20 percent. The federal dividend tax credit is 15 percent of the grossed-up dividend, and the provincial dividend tax credit is 7 percent of grossed-up dividend. There is no grossing-up for capital gain tax. Under the new tax environment, which stock will give best return to each investor? (Show calculation)