The shares of A and B both sell for $100 and offer a pretax return of 10

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The shares of A and B both sell for $100 and offer a pretax return of 10 percent. However, in the case of company A the return is entirely in the form of dividend yield (the company pays a regular annual dividend of $10 a share), while in the case of B the return comes entirely as capital gain (the shares appreciate by 10 percent a year). Suppose that dividends and capital gains are both taxed at 30 percent. What is the after-tax return on share A? What is the after-tax return on share B to an investor who sells after two years? What about an investor who sells after 10 years?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
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Principles of Corporate Finance

ISBN: 978-0072869460

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

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