XYZ co. has Just declared a dividend of $3. The average investor in Southern Rai
ID: 2761266 • Letter: X
Question
XYZ co. has Just declared a dividend of $3. The average investor in Southern Rail faces an ordinary tax rale of 50 percent. Altheugh the capital gains rate is also 50 percent, it is believed that the investor gets the advantage of deferring this tax until future years (the effective capital gains rate will therefore be 50 percent discounted back to the present). If the price of the stock before the ex-dividend day is $23 and it drops to $20.50 by the end of the ex-dividend day, how many years is the average investor deferring capital gains taxes? (Assume the opportunity cost used by the investor in evaluating future cash flows is 12 percent. (23 - 20.50)/1 =Explanation / Answer
capital gains tax rate = Stated Rate/(1+R)^n
Pb = Price before Dividend = $23 ,Pa price after dividend = 20.50 , Tax on ordinary to= 50%, Tax on capital gain tcg= 50%
(Pb - Pa) /Dividends= (1 - to) / (1- tcg) = ($23 - $20.50)/ $3 = (1-.5) / (1-(.5/1.12^n)
.83333 = .50/(1-.50/1.12)^n
n = 2 years approx
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.