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The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies.

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The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 2.9 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 35 percent. Gecko has an expected earnings growth rate of 11 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 pretax required return on Gordon’s stock?

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Fundamentals Of Corporate Finance

Fundamentals Of Corporate Finance

ISBN: 9781265553609

13th Edition

Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan

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Chapter # 17
Section: Questions and Problems
Problem: 13
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Question Posted: August 24, 2021 06:33:15
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The dividend yield or dividend–price ratio of a share is the dividend per share, divided by the price per share. It is also a company\\\'s total annual dividend payments divided by its market capitalization, assuming the number of shares is constant. It is often expressed as a percentage.

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