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Question 2 Firms A and B are both unlevered. The shares of both companies are currently trading at $100, and both offer an annual pre-tax
Question 2 Firms A and B are both unlevered. The shares of both companies are currently trading at $100, and both offer an annual pre-tax return of 10%. . In the case of firm A, the return is entirely in the form of a dividend yield (i.e., the company pays a regular annual dividend of $10 a share). In the case of firm B, the return comes entirely as capital gain (the shares appreciate by 10% a year). Suppose that an investor buys a share of each firm today, and plans to sell them in 10 years. Suppose that dividends and capital gains are both taxed at 30%. . Then: What is the annual after-tax yield (rate of return) on firm A's share over the 10-year period? . What is the annual after-tax yield (rate of return) on firm B's share over the 10-year period
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