Use the information for the question(s)below.
The JRN Corporation will pay a constant dividend of $3 per share per year in perpetuity.Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax.The cost of capital for investing in JRN stock is 12%.
-The WTC Corporation will pay a constant dividend of $3.20 per share,per year,in perpetuity.If all investors pay a 15% tax on dividends,there is no capital gains tax,and the cost of capital for investing in WTC stock is 9%,what is the price for a share of WTC stock?
A)$30.22
B)$26.67
C)$18.77
D)$16.45

Question

Quizplus · Accepted Answer

The correct answer is A because the price of a share of WTC stock is $30.22. This is calculated by dividing the annual dividend by the cost of capital and then multiplying by (1 - tax rate). In this case, the annual dividend is $3.20, the cost of capital is 9%, and the tax rate is 15%. So, the price of a share of WTC stock is $3.20 / 0.09 * (1 - 0.15) = $30.22.

Use the Information for the Question(s)below