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
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 | $ 16 |
B | 11 | 11 |
C | 16 | 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 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. Enter your answers as a percent rounded 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 after-tax return of 8%, 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 | Price |
A | $ |
B | $ |
C | $ |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started