The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 17 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 17 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The Gecko Company and the Gordon Company are two firms whose business risk is the
same but that have different dividend policies. Gecko pays no dividend, whereas
Gordon has an expected dividend yield of 2 percent. Suppose the capital gains tax rate
is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings
growth rate of 17 percent annually and its stock price is expected to grow at this same
rate. The aftertax expected returns on the two stocks are equal (because they are in the
same risk class). What is the pretax required return on Gordon's stock? (Do not round
intermediate calculations and enter your answer as a percent rounded to 2 decimal
places, e.g., 32.16.)
Pretax return
%
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