1. The Xigma Company and the Delta Company are two firms whose business risk is the same but that have different dividend policies. Xigma pays no dividend, whereas Delta has an expected dividend yield of 6 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Xigma has an expected earnings growth rate of 18 percent annually, and its stock price is expected to grow at this same rate. 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 Deltas stock? How would your results change if the capital gains tax rate is 15%?