Question

Stock	Expected Dividend	Expected Capital Gain
A	$0	$10
B	$5	$5
C	$10	$0

A. If each stock is priced at $110, what are the expected net percentage returns on each stock to (i) 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? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Stock	Pension	Investor Corp.	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 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.)

Stock	Price
A	_______
B	_______
C	_______

Answer 1

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NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) View Add-Ins Formulas Data Review - 2x Σ AutoSum : A 11 A A = = = V Wrap Text General Fill Z Tu A E Merge & Center - $ & ... % Number Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles 2 Clear Sort & Filter Editing Find & Select Alignment Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter BIU D Clipboard Font BD95 AR AS 94 PENSION FUND 96 97 98 99 AT AU AV AW AX AY AZ BA BB BC BD BE BX 95 AS PENSION FUND DOES NOT PAY ANY TAX, WHATEVER BE THE SOURCE OF INCOME, IT IS FULLY TAX FREE STOCK NET INCOME = DIVIDEND + CAPITAL GAIN NET PERCENTAGE RETURNS = NET INCOME/PRICE 9.09% 10/110*100 10 9.09% 10/110*100 10 9.09% 10/110*100 10 100 CORPORATION CORPORATION PAYS 35% TAX ON CAPITAL GAIN AND 10.5% ON DIVIDEND INCOME SO NET INCOME = CAPITAL GAIN (1-0.35) + DIVIDEND(1-0.105) STOCK NET INCOME NET PERCENTAGE RETURNS 10*(1-0.35) + 0*(1-0.105) = 5.91% 5*(1-0.35) + 5*(1-0.105) = 7.02% 0*(1-0.35) + 10(1-0.105) = 8.14% NET INCOME/PRICE *100 NET INCOME/110 *100 B 101 102 103 104 105 106 107 108 109 110 111 112 INDIVIDUAL INDIVIDUAL PAYS 15% ON DIVIDENDS AND 10% ON CAPITAL GAIN SO NET INCOME = CAPITAL GAIN (1-0.10) + DIVIDEND(1-0.15) STOCK NET INCOME NET PERCENTAGE RETURNS 10*(1-0.10) + 0*(1-0.15) = 8.18% B 5*(1-0.10) + 5*(1-0.15) = 7.95% 0*(1-0.10) + 10*(1-0.15) = 7.73% NET INCOME/PRICE *100 NET INCOME/110 *100 113 114 H O FCFARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST CF CASH FLOW STATW ferences PREF AND DIV POLICY BO! 120% I Rea 1 D.ER 9 * * TO ENG 30-11-2019)

NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut = = V General Calibri 11 A A BI U DA = * Wrap Text Merge Merge & Center Center SF 4:0 .00 8. Insert Delete Format E Copy Paste Format Painter Clipboard AS135 $ - % % Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells AR AS AT AU AV AW AX AY AZ BA BB BC BD BE BA STOCK PENSION CORPORATION 9.09% 9.09% 9.09% 5.91% 7.02% 8.14% INDIVIDUAL 8.18% 7.95% 7.73% с INVESTOR PAYS TAX EQUAL TO 50% ON DIVIDEND AND 20% ON CAPITAL GAIN AND RETURN ON STOCK AFTER TAX 58%, PRICE OF STOCK WILL BE = NET RETURN/8% 118 119 a 120 121 122 123 124 125 126 127 128 129 b 130 131 132 133 134 135 136 137 138 STOCK 100 81.25 62.5 formula=(0*(1-0.5) + 10*(1-0.2))/0.08 formual =(5*(1-0.5) + 5*(1-0.2))/0.08 formula =(10*(1-0.5) + 0*(1-0.2))/0.08 H O FCFARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST CF CASH FLOW STATW ferences Rea PREF AND DIV POLICY I BO! 120% 1 HAINE 02:28 * o 0 ENG 30-11-2019 D E R