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 $115, 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? Stock Pension investor corporation Individual A 8.70 % 6.86 % __________% B 8.70 % ___________% ___________% C 8.70 % __________% __________% 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. Stock Price A ____________ B _____________ C ______________
The expected pretax return on three stocks is divided between dividends and
| Stock | Expected Dividend | Expected Capital Gain |
| A | $0 | $10 |
| B | 5 | 5 |
| C | 10 | 0 |
Required:
a. If each stock is priced at $115, 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?
Stock Pension investor corporation Individual
A 8.70 % 6.86 % __________%
B 8.70 % ___________% ___________%
C 8.70 % __________% __________%
b. Suppose that investors pay 40% tax on dividends and 10%
Stock Price
A ____________
B _____________
C ______________
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