Investors Require an After-Tax Rate of Return of 12% on Their

question 107

Essay

Investors require an after-tax rate of return of 12% on their stock investments.The tax rate on dividends is 28%, while capital gains escape taxation.A firm will pay $3 per share in dividends one year from now, after which the stock is expected to be at a price of $15.Determine the current stock price and the expected before tax rate of return for a one-year holding period.
$$\begin{array}{l}\begin{array} { | l | r | } \hline\text { DATA }\\\hline \text { Investor return } & 12 \% \\\hline \text { Dividend amourt } & \$ 3.00 \\\hline \text { Tax rate } & 28 \% \\\hline \text { Future price prediction } & \$ 15.00 \\\hline\end{array}\end{array}$$

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Definitions:

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