Question

The expected pretax return on three stocks is divided between dividends and capital gains in the following way! Expected Expected Stock Dividend Capital Gain $10 50 Required: o. If each stock is priced at $195, what are the expected net percentage returns on each stock too) a pension fund that does not pay taxes, a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (ii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? b. Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and Cleach sell for? Assume the expected dividend is a level perpetuity Complete this question by entering your answers in the tabs below. Reg A Reg B If each stock is priced at $195, what are the expected net percentage returns on each stock to (1) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (i) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Show less Stock Pension Investor Corporation Individual

Answer 1

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? v L 02:57 ENG 25-02-207025 BP137 . X fix BJ B K BL BM BN BO BP BQ BR BS BT BUBVE 115 116 PENSION FUND 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 10 5.13% 10/195*100 10 5.13% 10/195*100 10 5.13% 10/195*100 123 CORPORATION 125 CORPORATION PAYS 21% TAX ON CAPITAL GAIN AND 6.3% ON DIVIDEND INCOME SO NET INCOME = CAPITAL GAIN (1-0.21) + DIVIDEND(1-0.063) STOCK NET INCOME NET PERCENTAGE RETURNS = NET INCOME/195*100 10*(1-0.21) + 0*(1-0.063) = 4.05% 5*(1-0.21) + 5*(1-0.063) = 4.43% 0*(1-0.21) + 10(1-0.063) = 4.81% 127 128 129 INDIVIDUAL INDIVIDUAL PAYS 10% ON DIVIDENDS AND 5% ON CAPITAL GAIN SO NET INCOME = CAPITAL GAIN (1-0.05) + DIVIDEND(1-0.1) STOCK NET INCOME NET PERCENTAGE RETURNS = NET INCOME/195*100 10*(1-0.05) + 0*(1-0.1) = 4.87% 5*(1-0.05) + 5*(1-0.1) = 4.74% 0*(1-0.05) + 10*(1-0.1) = 4.62% 134 135 136 137 138 ... FCF ARM, MSI.confidenceINDEX LOAN CURRENCY CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SUST PREF AND DIV POLICY ... :

1 Ale w ? v L 1 02:58 ENG 25-02-207025 X fix BP157 2 BI BJ B K BL BM BN BO BP BQ BR BS BT BUBVE 138 139 140 141 (a) STOCK 142 PENSION CORPORATION 5.13% 4.05% 5.13% 4.43% 5.13% 4.81% INDIVIDUAL 4.87% 4.74% 4.62% 143 144 146 (b) INVESTOR PAYS TAX EQUAL TO 40% ON DIVIDEND AND 10% ON CAPITAL GAIN AND RETURN ON STOCK AFTER TAX = 10%, PRICE OF STOCK WILL BE = NET RETURN/10% 148 150 STOCK 90 152 FORMULA =(0*(1-0.4) + 10*(1-0.1)/0.1 FORMULA =(5*(1-0.4) + 5*(1-0.1))/0.1 FORMULA = (10*(1-0.4) + 0*(1-0.1))/0.1 154 155 156 157 159 160 161 ... FCF ARM, MSI.confidenceINDEX LOAN CURRENCY CROSS OVER GM HPRAM TAX HEDGING MONEY MARKET GROWTH SUST PREF AND DIV POLICY ... :