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 $140, 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 15% on dividends and 10% on capital gains?
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.
If each stock is priced at $1.40, what are the expected net percentage on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying taxes at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gain?Do not round intermediate calculations. Enter your answers as a percent rounded to two decimal places)
Stock Pension investor corporation Individual
A ______% ___________% __________%
B ______% ___________% __________%
C _______% ____________% __________%
Stock Price
A ____________
B _____________
C ______________