The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 30 percent. Gecko has an expected earnings growth rate of 19 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax return %

The Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is 30 percent. Gecko has an expected earnings growth rate of 19 percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax return %

Name: The Gecko Company and the Gordon Company are two firms that have thes
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Description: The Gecko Company and the Gordon Company are two firms that have thesame business risk but different dividend policies. Gecko pays no dividend, whereasGordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rateis zero, whe

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 18MC

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The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 4 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 16 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Pretax return %
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NewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk-free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model (CAPM) to estimate NewLinePhone's cost of retained earnings. (*You must show your calculation process as well.)