Question

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	$8
B	3	3
C	22	0

a.

If each stock is priced at $100, what are the expected net returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 35% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock	Pension	Investor Corporation	Individual
A	%	%	%
B	%	%	%
C	%	%	%

b.

Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an 8% return after tax, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock	P0
A	$
B
C