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' expectations of a 15% after-tax yield if dividends are taxed at 28%? Ignore capital gains taxes due to investor timing.

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax yield investors expect:
15% * (1 - 28%) = 10.8%
Then, we can calculate the price the stock must sell for in one year:
$4 / (1 - 28%) = $5.56 (pre-tax dividend)
$65 + $5.56 = $70.56 (one-year future price)
Now we need to adjust for the after-tax yield:
$70.56 / (1 - 10.8%) = $79.22 (pre-tax one-year future price)
Finally, we need to adjust for the future dividend payment:
$79.22 - $4 = $75.22 (pre-tax stock price in one year)
Round to the nearest cent, the stock must sell for $71.87 in one year to meet investors' expectations of a 15% after-tax yield. So, the best choice is B.

A Stock Is Currently Priced at $65 Per Share and Will