Two corporations A and B have exactly the same risk,and both have a current stock price of $100.Corporation A pays no dividend and will have a price of $120 one year from now.Corporation B pays dividends and will have a price of $113 one year from now after paying the dividend.The corporations pay no taxes and investors pay no taxes on capital gains,but pay a 30% income on dividends.What is the value of the dividend that investors expect corporation B to pay one year from today?

Question

Quizplus · Accepted Answer

Since the risk is the same for both corporations, the stock prices of both corporations should be the same. Therefore, the difference between the stock prices of Corporation A and B ($7) must be equal to the present value of the dividend that Corporation B is expected to pay.

Let X be the expected dividend of Corporation B. Then, we can set up the following equation:

$100 + 0.7X = $113

Solving for X, we get:

X = $10

Therefore, the value of the dividend that investors expect Corporation B to pay one year from today is $10.

Two Corporations a and B Have Exactly the Same Risk,and