(8.2) in RWJR page 266 refers to this formula for no growth dividends P0 = D/r

Price at time zero= Dividend / required return

Gordon Growth Model and Biden Tax Plan (10 points) . Suppose earnings before tax per share or EBT/share is $1 and the dividend payout rate is 100%. The return on equity or Re is 10%. Suppose the corporate tax rate is 21% and there is no growth due to zero retained earnings (i.e., zero growth in dividends). The number of shares also remains constant. Using (8.2) in RWJR page 266, find the fundamental value of each share Po. (1 point) 3b. Now suppose the corporate tax rate is increased to 26.5%. Find the fundamental value of each share P'o now. What is the percentage change in the share price? (1 point) 3c. Show that we get the same percentage change in the share price regardless of what EBT/share or Re is. Hint: Let EBT/share = X and Re = r. (2 points) What is causing the share price to change? Are earnings changing? If not, why is the share price changing? (2 points) The Biden Tax Plan proposes an increase in the U.S. corporate tax rate from 21% to 26.5%. Examine the behavior of weekly S&P 500 adjusted closes and returns in 2021. Make inferences about investors' expectations that the Biden Tax Plan will actually pass Congress and become law. (4 points) 3d. Gordon Growth Model and Biden Tax Plan (10 points) . Suppose earnings before tax per share or EBT/share is $1 and the dividend payout rate is 100%. The return on equity or Re is 10%. Suppose the corporate tax rate is 21% and there is no growth due to zero retained earnings (i.e., zero growth in dividends). The number of shares also remains constant. Using (8.2) in RWJR page 266, find the fundamental value of each share Po. (1 point) 3b. Now suppose the corporate tax rate is increased to 26.5%. Find the fundamental value of each share P'o now. What is the percentage change in the share price? (1 point) 3c. Show that we get the same percentage change in the share price regardless of what EBT/share or Re is. Hint: Let EBT/share = X and Re = r. (2 points) What is causing the share price to change? Are earnings changing? If not, why is the share price changing? (2 points) The Biden Tax Plan proposes an increase in the U.S. corporate tax rate from 21% to 26.5%. Examine the behavior of weekly S&P 500 adjusted closes and returns in 2021. Make inferences about investors' expectations that the Biden Tax Plan will actually pass Congress and become law. (4 points) 3d