The Gecko Company and the

Gordon Company are two firms whose business risk is the same but that

have different dividend policies. Gecko pays no dividend, whereas Gordon

has an expected dividend yield of 3.5 percent. Suppose the capital gains tax

rate is zero, whereas the income tax rate is 35 percent. Gecko has an

expected earnings growth rate of 12 percent annually, and its stock price is

expected to grow at this same rate. If the aftertax expected returns on the

two stocks are equal (because they are in the same risk class), what is the

pretax required return on Gordon's stock?