Question: The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock-A,B,C. Expected Dividend- $0, $5, $10. Expected

The expected pretax return on three stocks is divided between dividends and capital gains in the following way:

Stock-A,B,C. Expected Dividend- $0, $5, $10. Expected Capital Gain-$10, $5, $0

Required: a. If each stock is priced at $120, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 21% (the effective tax rate on dividends received by corporations is 6.3%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains?

b. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains. If stocks are priced to yield an after-tax return of 8%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity.

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