Question
The expected pretax return on three stocks is divided between dividends and capital gains in the following ways: Stock A Expected Dividend - $0 Expected
The expected pretax return on three stocks is divided between dividends and capital gains in the following ways: Stock A Expected Dividend - $0 Expected Capital Gain - $19 Stock B Expected Dividend - $14 Expected Capital Gain - $14 Stock C Expected Dividend - $19 Expected Capital Gain - $0 A) If each stock is priced at $100, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) B) Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, 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.)
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