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What is the expected price of the stock

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Question - Consider time 0, 1, and 2. A dividend is paid at time 1. The ex-dividend date = dividend payment date. For individual shareholders, the personal tax rate on dividend is 40% and that on capital gains is 15%. For institutional shareholders, the personal tax rate on dividend is 2% and that on capital gains is 50%. The after-tax expected return on equity is 20% between time 0 and time 1, and 10% between time 1+ and time 2. The stock price is worth 1000 at time 0. The stock price is expected to be worth 1200 at time 2. Remark: The notation t+ stands for time t right after cash-flows have been paid. Place yourself at time 1+.

a) What is the (expected) price of the stock at time 1+ when all shareholders are individuals (Pie(1+))? Remark: This price is the so-called ex-dividend price.

(b) What is the (expected) price of the stock at time 1+ when all shareholders are institutions (Pfe(1+))? Remark: This price is the so-called ex-dividend price.

Reference no: EM132921348

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