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 |
$18 |
| B |
9 |
9 |
| C |
18 |
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 20% 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.)
|