Sunday, August 2, 2020

Expected Return, Dividends, and Taxes

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. Gordon has an expected dividend yield of 2.5 percent.
Suppose the capital gains tax rate is zero. The dividend tax rate is 35 percent.
Gecko has an expected earnings growth of 12 percent annually and its stock price is expected to grow at the same rate. If the after tax expected returns are equal what is the pretax required return on Gordon's stock?




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