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Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter10: Forecasting Financial Statement

Section: Chapter Questions

Problem 8QE

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Stock	Expected Dividend	Expected Capital Gain
A	$0	$10
B	$5	$5
C	$10	$0

A.)If each stock is priced at $175, what are the expected netpercentage 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% on tax 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 sdell for? Assume the expected dividend is a level perpetuity.

(Please answer B)

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