Question

The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Expected Dividend $0 Expected Capital Gain $10 Stock 10 a. If each stock is priced at $170, 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.) Investor 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 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

Answer 1

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Home ert Page Layout Formulas Data Review V Add-Ins 義Cut aCopy Format Painter AutoSum Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Sort &Find & Formatting as Table Styles ClearFilter Select Clipboard Font Cells dting Alignment ANI AC AM AB AE AH Al Al AK AL AN AD AG 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 5.88% 5.88% 5.88% 10/170 100 10/170*100 10/170 100 10 10 10 4 6 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 9 NET PERCENTAGE RETURNS NET INCOME/170*100 10 10 (1-0.35) +0 (1-0.105) 5*(1-0.35) 5*(1-0.105) 0(1-0.35)+10(1-0.105)- 3.82% 4.54% 5.26% 12 13 14 15 16 17 18 19 11 1 ト 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) 5 1-0.10)5*(1-0.15)- 0*(1-0.10) 10*(1-0.15) l, confidence!NDEX CURRENCY 5.29% 5.15% 5.00% NET INCOME/170*100 NPV 0CF CASH FLOW STATIN | FCF i LOAN CROSS OVER HEDGİNG MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV 22-04-2019

Home ert Page Layout Formulas Data Review V 義Cut ta copy." Add-Ins AutoSum 11 Arap Text Fill В า 프. m. a-Δ. Ξミ 迣锂函Merge & Center. $, % , 弼皛Conditional Format. Cell. Insert Delete Format Sort &Find & Format Painter Formatting as Table Styles ClearFilter Select Clipboard Font Cells dting Alignment AH35 AC AH Al Al AK AL AM AN AB AD AE AG 25 (a) 26 27 28 29 30 31 (b) 32 STOCK PENSION CORPORATION INDIVIDUAL 5.88% 5.88% 5.88% 3.82% 4.54% 5.26% 5.29% 5.15% 5.00% INVESTOR PAYS TAX EQUAL TO 50% ON DIVIDEND AND 20% ON CAPITAL GAIN AND RETURN ON STOCK AFTER TAX-8% PRICE OF STOCK WILL BE-NET RETURN/8% STOCK 35 36 37 38 39 40 41 42 100 formula-(0*(1-0.5)10*(1-0.2))/0.08 81.25 formua(5*(1-0.5)5*(1-0.2)/0.08 62.5 formula (10 (1-0.5) 0 1-0.2))/0.08 4H NPV 0CF CASH FLOW STATW FCFA l, confidence!NDEX CURRENCY LOAN CROSS OVER HEDGİNG MONEY MARKET GM HPR AM TAX GROWTH SUST PREF AND DIV 齞"z a 옐9L ! @a; ENIG 22-04-2019