Question

the expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain

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

a. If each stock is priced at $135, 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 45% (the effective tax rate on dividends received by corporations is 10.5%), and (iii) 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.)

Answer is complete but not entirely correct.

Stock	Pension		Investor Corporation		Individual
A	6.06selected answer incorrect	%	3.33selected answer incorrect	%	5.76selected answer incorrect	%
B	6.06selected answer incorrect	%	4.38selected answer incorrect	%	5.61selected answer incorrect	%
C	6.06selected answer incorrect	%	5.42selected answer incorrect	%	5.45selected answer incorrect	%

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 C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Answer is complete but not entirely correct.

Stock	Price
A	$100.00selected answer incorrect
B	$81.25selected answer incorrect
C	$62.50selected answer incorrect

Answer 1