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%. 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% a year). Suppose that dividends and capital gains are both taxed at 30%. 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?
Visit us at www.mhhe.com/bma 416 Part Five Payout Policy and Capital Structure AppendixLO1
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