Dividend Returns. Are dividends really all that important to investors in publicly traded companies? Arenât capital gains really the point or objective of the investor? Highlight some differences between dividend returns and capital gains.

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Nestor RutherfordLv2

28 Sep 2019

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The expected pretax return on three stocks is divided between dividends and capital gains in the following way: Stock Expected Dividend Expected Capital Gain A $ 0 $ 16 B 11 11 C 16 0 a. If each stock is priced at $100, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 35% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 15% on dividends and 10% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Stock Pension Investor Corporation Individual A % % % B % % % C % % % b. Suppose that investors pay 50% tax on dividends and 20% tax on capital gains.

Which of the following statements about dividend is NOT true? _____ Bird-in-the-hand theory says that investors think dividends are less risky than potential future capital gains, so they like dividends. Tax preference theory indicates that low dividend payments mean higher capital gains. Capital gains taxes are lower than dividend taxes, and they can be deferred. So investors prefer low-dividend-payments or non-dividend-payments firms. Based on the Bird-in-the-hand theory, a firm should set high dividend payout ratio to increase firm value. Based on the Tax preference theory, a firm should pay more dividends to increase firm value.

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The expected pretax return on three stocks is divided between dividends and capital gains in the following way:

Stock	Expected Dividend	Expected Capital Gain
A	$ 0	$ 7
B	2	2
C	23	0

If each stock is priced at $100, what are the expected net percentage returns on each stock to (i) a pension fund that does not pay taxes, (ii) a corporation paying tax at 45% (The effective tax rate on dividends received by corporations is 10.5%), and (iii) an individual with an effective tax rate of 10% on dividends and 5% on capital gains? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

Stock	Pension	Investor Corporation	Individual
A	%	%	%
B	%	%	%
C	%	%	%

Suppose that investors pay 40% tax on dividends and 10% tax on capital gains. If stocks are priced to yield an after-tax return of 10%, what would A, B, and C each sell for? Assume the expected dividend is a level perpetuity. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Stock	Price
A	$
B	$
C	$

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Dividend Returns. Are dividends really all that important to investors in publicly traded companies? Arenât capital gains really the point or objective of the investor? Highlight some differences between dividend returns and capital gains.

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Dividend Returns. Are dividends really all that important to investors in publicly traded companies? Arenât capital gains really the point or objective of the investor? Highlight some differences between dividend returns and capital gains.