The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Required
Posted: Sat Feb 26, 2022 9:12 am
The expected pretax return on three stocks is divided between
dividends and capital gains in the following way:
Required:
a. If each stock is priced at $165, 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.
dividends and capital gains in the following way:
Required:
a. If each stock is priced at $165, 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.