dividends and capital
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 | $ 0 | $ 2 |
| B | 12 | 12 |
| C | 28 | 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 | $ |
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