Question: Deaton Co. and Grebe, Inc., are in the same risk class. Shareholders expect Deaton to pay a $4 dividend next year when the stock will

Deaton Co. and Grebe, Inc., are in the same risk class. Shareholders expect Deaton to pay a $4 dividend next year when the stock will sell for $20. Grebe has a no-dividend policy. Currently, Grebe stock is selling for $20 per share. Grebe shareholders expect a $4 capital gain over the next year. Capital gains are not taxed, but dividends are taxed at 25 percent.

a. What is the current price of Deaton Co. stock?

b. If capital gains are also taxed at 25 percent, what is the price of Deaton Co. stock?

c. Explain the result you found in part (b).

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