The expected pretax return on three stocks is divided between dividends and capi

Question

The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Expected Dividend $0 20 40 Expected Capital Gain $40 20 Stock 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.) Investon Corporation Stock Pension Individual 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

Explanation / Answer

Stock Dividend Cap. Gain A 0 40 B 20 20 C 40 0 a) Pension Corporation Individual Tax rate - Dividend 0% 35% 15%                    - Cap. Gain 0% 35% 10% Return - Post tax (div + Cap Gain)/Price Stock A Dividend 0 0 0 Capital Gain 40 40 40 Post tax Dividend - 0 0 0 + Post tax capital gain 40 26 36 Total return(D+c) 40 26 36 Price 100 100 100 Return(%) = Return/Price x 100 40% 26% 36% Stock B Dividend 20 20 20 Capital Gain 20 20 20 Post tax Dividend - 20 13 17 + Post tax capital gain 20 13 18 Total return(D+c) 40 26 35 Price 100 100 100 Return(%) = Return/Price x 100 40% 26% 35% Stock C Dividend 40 40 40 Capital Gain 0 0 0 Post tax Dividend - 40 26 34 + Post tax capital gain 0 0 0 Total return(D+c) 40 26 34 Price 100 100 100 Return(%) = Return/Price x 100 40% 26% 34% b) Tax rate - Dividend 50%                    - Cap. Gain 20% Return - Post tax (div + Cap Gain)/Price Stock A Stock B Stock C Dividend 0 20 40 Capital Gain 40 20 0 Post tax Dividend - 0 10 20 + Post tax capital gain 32 20 0 Total return(D+c) 32 30 20 Yield(given) 8% 8% 8% Price = Return/0.08 400.00 375.00 250.00 Please provide feedback…. Thanks in advance… :-)

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