Assume that the tax rate on capital gains is 15%, while the tx rate on dividend...

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Finance

Assume that the tax rate on capital gains is 15%, while the txrate on dividend income is 20 %. An investor is comparing twooptions for the stock of ABC firm: I) receive $100 of dividendincome now, II) get unrealized capital gains of $100 nowwhich are left to grow with the firm for five years. The expectedrate of return on the stock of ABC firm is 8%. The investor willinvest his after-tax dividend income in ABC stock for five years.How much higher after-tax income the investor will get in fiveyears under the capital gains option II than under the dividendincome option I (i.e., difference of option II income over option Iincome)?
1.
$15.37
2.
$12.977
3.
$7.08
4.
$5.798

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Option1 Receive dividend and then invest in the stock of ABC firm Dividend 10000 Dividend tax 20 Dividend after dividend tax 8000 This is invested in stock 8 for 5 years Amount invested 8000 Return 8 Time in years 5 Amount See Answer

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Assume that the tax rate on capital gains is 15%, while the txrate on dividend income is 20 %. An investor is comparing twooptions for the stock of ABC firm: I) receive $100 of dividendincome now, II) get unrealized capital gains of $100 nowwhich are left to grow with the firm for five years. The expectedrate of return on the stock of ABC firm is 8%. The investor willinvest his after-tax dividend income in ABC stock for five years.How much higher after-tax income the investor will get in fiveyears under the capital gains option II than under the dividendincome option I (i.e., difference of option II income over option Iincome)?1.$15.372.$12.9773.$7.084.$5.798