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 | $10 |
B | $5 | $5 |
C | $10 | $0 |
Required: a. If each stock is priced at $105, 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 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains?
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.
Stock | Pension | Investor Corporation | Individual |
A | % | % | % |
B | % | % | % |
C | % | % | % |
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.)
Stock | Price |
A | $ |
B | $ |
C | $ |
Step by Step Solution
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Step: 1
a To calculate the expected net percentage returns on each stock for different types of investors we need to consider the tax rates and the expected d...Get Instant Access to Expert-Tailored Solutions
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