The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 6 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 35 percent. Gecko has an expected earnings growth rate of 12 percent annually, and its stock price is expected to grow at this same rate. If the after-tax expected returns on the two stocks are equal (because they are in the same risk class), what is the pre-tax required return on Gordon’s stock?
Answer to relevant QuestionsAs discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex-dividend. Once we consider the role of ...Roll Corp. (RC) currently has 260,000 shares of stock outstanding that sell for $78 per share. Assuming no market imperfections or tax effects exist, what will the share price be after a. RC has a five-for-three stock ...The Clifford Corp. has announced a rights offer to raise $28 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a non-refundable reviewing fee of ...In 2012, Whit by Enterprises issued $5 million in bonds. At issue, the bonds carried a yield of 80 basis points above comparable Government of Canada bonds yielding 7.35 percent. When Whit by originally issued the debt, the ...Recently several companies have issued bonds with 100-year maturities. Critics charge that the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell “equity in ...
Post your question