Investors Require an After-Tax Rate of Return of 10% on Their

question 10

Essay

Investors require an after-tax rate of return of 10% on their stock investments.The tax rate on dividends is 28%, while capital gains escape taxation.A firm will pay $2 per share in dividends one year from now, after which the stock is expected to be at a price of $20.Determine the current stock price and the expected before tax rate of return for a one-year holding period.
$$\begin{array}{l}\begin{array} { | l | r | } \hline \text { DATA }\\\hline \text { Investor return } & 10 \% \\\hline \text { Dividend arnourt } & \$ 2.00 \\\hline \text { Tax rate } & 28 \% \\\hline \text { Future price prediction } & \$ 20.00 \\\hline\end{array}\end{array}$$

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Definitions:

Liability

The legal responsibility to settle a debt or fulfill an obligation, potentially involving payment for damages in legal cases.

Employer

An individual or organization that hires and pays individuals to perform services or work.

Escape

The act of breaking free from confinement or restraint, often used in the context of escaping from prison or custody.

Agent's Crime

Illegal acts committed by an individual (agent) acting on behalf of another party.