Dividends and Taxes [4]

A given share is sold for $30 just before time t0. If the firm pays a $3 dividend per share, the price will immediately drop to $27. Suppose you own 100 shares. If the firm decides not to distribute dividends, you would need to sell 10 shares (at$30 a share) since you need to have a $300 cash income (pre tax) Assume that the shares were originally bought for $20 each.

1. If both ordinary personal tax rate and capital gains tax are 28%, what is your after-tax wealth under the two alternative situations?

2. Suppose now the tax rates for capital gains are lower, you pay 40% tax on ordinary income, and 16% tax on capital gains. What is your after-tax wealth under the two alternative situations?