newconn Liberty Unive... My eContent Blackboard Learn Tool. Chapter 17 6 Help Sa
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newconn Liberty Unive... My eContent Blackboard Learn Tool. Chapter 17 6 Help Save& ExitSubmlt Check my work 3 The expected pretax return on three stocks is divided between dividends and capital gains in the following way: 6 $0 $10 10 a. If each stock is priced at $100, what are the expected net percentage returns on each stock to () a pension fund that does not pay taxes, (ii) a corporation paying tax at 35% (the effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? Hint (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Print Investor Stock Pension CorporationIndividual b. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, 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.)Explanation / Answer
Stock
Pension
Investor Corporation
Individual
A
($0+$10)/$100= 10%
[$0 *(1-10.5%)+$10* (1-35%)/$100=3.25%
[$0 *(1-15%)+$10* (1-10%)/$100=9%
B
($5+$5)/$100=5%
[$5*(1-10.5%)+$5* (1-35%)/$100=7.725
[$5*(1-15%)+$5* (1-10%)/$100=8.75%
C
($10+$0)/$100=10%
[$10*(1-10.5%)+$0* (1-35%))/$100=8.95
[$10*(1-15%)+$0* (1-10%))/$100=8.5%
Stock
A
B
C
Expected Dividend
$0
$5
$10
Tax rate on dividends
50%
50%
50%
After tax dividends(A)
$0
$2.5
$5
Expected Capital Gain
$10
$5
$0
Tax rate on capital gain
20%
20%
20%
After tax capital gain(B)
$8
$4
$0
Total after tax income(A+B=C)
$8
$6.5
$5
After tax yield return rate(D)
8%
8%
8%
Stock price(C/D)
$100
$81.25
$62.5
Stock
Pension
Investor Corporation
Individual
A
($0+$10)/$100= 10%
[$0 *(1-10.5%)+$10* (1-35%)/$100=3.25%
[$0 *(1-15%)+$10* (1-10%)/$100=9%
B
($5+$5)/$100=5%
[$5*(1-10.5%)+$5* (1-35%)/$100=7.725
[$5*(1-15%)+$5* (1-10%)/$100=8.75%
C
($10+$0)/$100=10%
[$10*(1-10.5%)+$0* (1-35%))/$100=8.95
[$10*(1-15%)+$0* (1-10%))/$100=8.5%
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