Shares in Growth Products Inc. are priced at $100. Investors expect the total pretax rate of return

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Shares in Growth Products Inc. are priced at $100. Investors expect the total pretax rate of return to be 10%. The tax rate on both capital gains and dividends is 15%.

a. If the entire return on the shares is in the form of dividends, what is the investor's annualized after-tax rate of return for a holding period of 1 year? 5 years? 10 years? 20 years?

b. What is the investor's annualized after-tax rate of return for each holding period if all of the pretax return is in the form of capital gains?

c. Explain why capital gains may be preferred to dividends even if the tax rate on the two are equal.

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Related Book For  book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0078034640

7th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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