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Memphic Memphic
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6 years ago
Wyatt Oil pays a regular dividend of $2.50 per share. Typically the stock price drops by $2.00 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactions cost, the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to:
A) 0%
B) 20%
C) 24%
D) 36%
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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#1
6 years ago
D
Explanation:  D) (Pcum - Pex)(1 - Tg) = DIV(1 - Td) → $2.00 (1 - .20) = $2.50 (1 - Td)
   →   = 1 - Td → Td = 1 -   → td = .36 or 36%
At 36% there would be no benefit to capturing the dividend, the tax rate must be slightly below this amount.
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