newconn Liberty Unive My eContent Blackboard Learn Tool Chap

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.)

Solution

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%