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Corporate Finances

Investor A owns $1,000 worth of stock that does not pay a dividend. Investor B owns $1,000 of an equivalent stock that, after paying a dividend, becomes an investment in stock and cash: $900 in stock and $100 in dividend income. If the capital gains tax is lower than the tax on dividends, which investor has the better position: Investor A selling 10% of the stock to make an equivalent homemade dividend, or Investor B?

Solution Preview

First work out the calculations. I assume a 35% regular tax bracket and 15% capital gains tax.

Investor A sells 10% of the stock to get a $100 gain. The gain in taxed at 15%, thus $15. The net cash in ...

Solution Summary

Investor A owns $1,000 worth of stock that does not pay a dividend. Investor B owns $1,000 of an equivalent stock that, after paying a dividend, becomes an investment in stock and cash: $900 in stock and $100 in dividend income. If the capital gains tax is lower than the tax on dividends, which investor has the better position: Investor A selling 10% of the stock to make an equivalent homemade dividend, or Investor B?

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