Compute the before-tax expected return on the stock

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Question - Consider time 0, 1, and 2. A dividend is paid at time 1. The ex-dividend date = dividend payment date. For individual shareholders, the personal tax rate on dividend is 40% and that on capital gains is 15%. For institutional shareholders, the personal tax rate on dividend is 2% and that on capital gains is 50%. The after-tax expected return on equity is 20% between time 0 and time 1, and 10% between time 1+ and time 2. The stock price is worth 1000 at time 0. The stock price is expected to be worth 1200 at time 2. Remark: The notation t+ stands for time t right after cash-flows have been paid.

Place yourself at time 1+.

(a) Compute the before-tax expected return on the stock between time 1+ and time 2 when all shareholders are individuals (rS,i(1+)).

(b) Compute the before-tax expected return on the stock between time 1+ and time 2 when all shareholders are institutions (rS,f (1+)).

Reference no: EM132922103

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