Reference no: EM132500874

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 $155, 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.

Complete this question by entering your answers in the tabs below.

Required section of A

Required section of B

If each stock is priced at $155, 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? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Required section of A

Stock Pension Investor Corporation Individual

A _______% ___________________% __________%

B _______% ____________________% __________%

C _______% ____________________% __________%

Required section of B

Stock Price

A __________

B ___________

C ___________