The stocks of Firms A and B are considered to be equally risky. Investors expect the share of Firm A, which does not intend to pay any dividend, to…

Firm A: Next year's price = ₹100 Dividend = ₹0 Let the current price be A Post-tax capital appreciation = 0.88 (100 - A) Post-tax dividend income = 0 Total return = 0.88 (100 - A) Given that the post-tax rate of return is 18% (0.18): 0.88 (100 - A) / A = 0.18 88 - 0.88A = 0.18A 88 = 1.06A A = 88 / 1.06 = ₹83.02 Firm B: Next year's price = ₹90 Dividend = ₹10 Let the current price be B Post-tax capital appreciation = 0.88 (90 - B) Post-tax dividend income = 0.75 × 10 = ₹7.5 Total return = 0.88 (90 - B) + 7.5 Given that the post-tax rate of return is 18% (0.18): (0.88 (90 - B) + 7.5) / B = 0.18 79.2 - 0.88B + 7.5 = 0.18B 86.7 = 1.06B B = 86.7 / 1.06 = ₹81.79 Current price (obtained by solving the preceding equation) A B Next year's price 100 90 Dividend 0 10 Let the current price be A B Post-tax capital appreciation 0.88(100-A) 0.88 (90-B) Post-tax dividend income 0 0.75 x 10 Total return 0.88 (100-A) 0.88 (90-B) + 7.5 A B = 18% =18% Current price (obtained by solving the preceding equation) A = ₹83.02 B = ₹81.79