Part A

Ginger, Inc., has declared a $5.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Ginger stock sells for $94.10 per share, and the stock is about to go ex dividend.

What do you think the ex-dividend price will be?

Part B

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 2 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 30 percent. Gecko has an expected earnings growth rate of 17 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class).

What is the pretax required return on Gordons stock?

Part C

You own 1,100 shares of stock in Avondale Corporation. You will receive a $1.50 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $72 per share. The required return on Avondale stock is 20 percent. Suppose you want only $750 total in dividends the first year.

What will your homemade dividend be in two years?