Suppose that Firm D and Firm G both generate the same after-tax return of 20%. Shares of firm G currently trade at $10 per share. Firm G does not pay a dividend. Firm D pays a dividend of $1.50 per share in one year. Both firms are identical except for their payout policies. Capital gains are taxed at 15%, and dividends are taxed at 25%. Assume that you can apply capital losses against future capital gains.
a) Calculate the price of firm G in one year. Explain your reasoning.
Already have the price will be $11.70 in one year
b) Calculate the before-tax and after-tax dollar return to owning firm G for one year.
Have the dollar return as $1.70 (11.7-10)
c) Calculate the before-tax and after-tax percentage return to owning firm G for one year.
Percentage return is 20% (pre-tax) and 17% (after-tax)
d) Calculate the price of firm D in one year.
e) Calculate the price of firm D today.
f) Calculate the before-tax and after-tax dollar return to owning firm D for one year.
g) Calculate the before-tax and after-tax percentage return to owning firm D for one year.
h) What is the before-tax discount rate you used to value the shares in Firm G and D? By how much larger is it than the after-tax return of 20%? Explain why it is larger.