Southern Rail has just declared a dividend of $1. The average investor in Southern Rail faces an

Question:

Southern Rail has just declared a dividend of $1. The average investor in Southern Rail faces an ordinary tax rate of 50%. Although the capital gains rate is also 50%, 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% discounted back to the present). If the price of the stock before the ex-dividend day is $10 and it drops to $9.20 by the end of the ex-dividend day, how many years is the average investor deferring capital gains taxes? (Assume that the opportunity cost used by the investor in evaluating future cash flows is 10%.)

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... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...