The value of the dividend that investors expect corporation B to pay one year fr

Question

The value of the dividend that investors expect corporation B to pay one year from today is $10

Given that corporations A and B have exactly the same risk and both have a current stock price of $100. We can assume that the before-dividend stock price of Corporation B one year from now will also be $120 (stock price of Corporation A, one year from now).

Expected dividend by shareholders=Expected before dividend stock price - Expected after dividend stock price / (1- Income tax rate on dividends)

Expected dividend by sharholders = $120 - $113 / (1- 0.30) = $7 / 0.70 = $10

Explanation / Answer

Solution-

The same return of $20 want by the investors of the company or corporation B. on an after-tax basis as investors who invest in the company or corporation A.

After-tax dollar return form dividends = $120 - $113

After-tax dollar return form dividends = $7

Tax on dividend = 30%

So,

Expected dividend by shareholders = $7/(1-.30)

Expected dividend by shareholders = $10 dividend

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