The expected pretax return on three stocks is divided between dividends and capital gains in...
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Finance
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
A. If each stock is priced at $185, 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.
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