Question

a stock is currently priced at $65 per share and will pay a $4 dividend in one year. what must the stock sell for in one year to meet investors expecations of a 15% after tax return if dividends are taxed at 37% and there are no capital gains

Answer 1

$72.23

Step-by-step explanation:

Expected Return = [Dividend *(1- tax rate)] + [Capital gain] / Current stock price

Expected Return = [Dividend *(1- tax rate)] + [Price after 1 year - Current price] / Current stock price

15% = [$4*(1-0.37)]+[Price after 1 year -$65]/65

15% = [$4*0.63]+[Price after 1 year -$65]/65

15% * 65 = $2.52 + [ Price after 1 year -$65]

$9.75 = $2.52 + [Price after 1 year - $65]

Price after 1 year = $9.75 - $2.52 + $65

Price after 1 year = $72.23