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What is the pretax required return on gordon stock

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Problem 1: The Gecko Company and the Gordon Company are two firms whose business risk is the samewhile having different dividend policies. Gecko pays no dividend, whereas Gordon has an expecteddividend yield of 3.5 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 28percent. Gecko has an expected earnings growth rate of 12 percent annually, and its stock price isexpected to grow at this same rate. If the aftertax expected returns on the two stocks are equal (becausethey are in the same risk class), what is the pretax required return on Gordon's stock?

Reference no: EM132995909

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