Corporate Finance Question from McGraw Hill Connect Homework 11

| March 14, 2016

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 $36

B 18 18

C 36 0

a.

If each stock is priced at $100, what are the expected net returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 35%, and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock Pension Investor

Corporation Individual

A % % %

B % % %

C % % %

b.

Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an 8% return after tax, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock P0

A $

B

C

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