(2) Individual investors, asset management firms and institutional investors are subject to 40%, 10% and 5% taxation on dividends and 20%, 25% and 10% on capital gains respectively. They all invest in growth stocks, neutral stocks and blue chips. Growth stocks are expected to pay dividends of 2 USD and have capital gains of 30 every year perpetually. The same forecasts for neutral stocks are 7 and 7 and for blue chips 40 and 5. The institutional investors are the marginal investors and can determine the price of the stocks. Every category of investor maximises their after-tax income.

(i) Suppose that institutional investors require a 10% after-tax return. What are the prices of the growth, neutral, and bluechip stocks?

(ii) Calculate the after-tax returns of the three types of stocks for each investor category.

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Stock Prices and AfterTax Returns i Stock Prices We need to find the price P for each stock where th... View the full answer