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Category > Business & Finance Posted 31 Jul 2017 My Price 8.00

1. Adherents of the “dividends-are-good” school sometimes

1. Adherents of the “dividends-are-good” school sometimes point to the fact that stocks with high yields tend to have above-average price–earnings multiples. Is this evidence c onvincing? Discuss.

2. Suppose that there are just three types of investors with the following tax rates:

 

Individuals

Corporations

Institutions

Dividends

50%

5%

0%

Capital gains

15

35

0

Individuals invest a total of $80 billion in stock and corporations invest $10 billion. The remaining stock is held by the institutions. All three groups simply seek to maximize their after-tax income.

These investors can choose from three types of stock offering the following pretax payouts:

 

Low Payout

Medium Payout

High Payout

Dividends

$5

$5

$30

Capital gains

15

5

0

These payoffs are expected to persist in perpetuity. The low-payout stocks have a total market value of $100 billion, the medium-payout stocks have a value of $50 billion, and the high-payout stocks have a value of $120 billion.

a. Who are the marginal investors that determine the prices of the stocks?

b. Suppose that this marginal group of investors requires a 12% after-tax return. What are the prices of the low-, medium-, and high-payout stocks?

c. Calculate the after-tax returns of the three types of stock for each investor group.

d. What are the dollar amounts of the three types of stock held by each investor group?

 

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Status NEW Posted 31 Jul 2017 01:07 PM My Price 8.00

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