The market price of a firm\'s stock increased 8% each year for three years. If b
ID: 2798213 • Letter: T
Question
The market price of a firm's stock increased 8% each year for three years. If both capital gains and dividends are taxed at 20%, how much greater would your after-tax return have been if yo sold the stock at the end of three years than if the firm had instead paid out 8% a year in dividend income? A 62 basis points B 20 basis points C 80 basis points D 32 basis points 30 Which of the following statements regarding capital gain income and dividend income is true? Tax clienteles among retail investors minimize the tax penalty on dividend income Capital losses can be used to offset both capital gain income and dividend income which results in lower personal income taxes on your investment income none are true Income in the form of capital gains enables an investor to minimize his personal tax liabili A C more than dividend income doesExplanation / Answer
29)
Assuming capital gains: Value = 1.08^3= 1.2579
Adjusting for tax = (1.2579-1)*(1-0.2)=20.777%
If dividends are paid
Adjusting dividends for tax =0.08*0.8=0.064
Value at 3 years = 1.064^3=20.455%
Difference = 0.32%
hence option D is correct
30)Capital losses can be offset to reduce future tax gains hence B is correct
A is wrong because Tax clientele will increase tax penalty
D is wrong because dividends will minimize tax liability
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