Assume you purchased the stock of Del Mar Spa at $35 per share one year ago,...

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Assume you purchased the stock of Del Mar Spa at $35 per shareone year ago, its current price is $42. Sitting on an enviable hugecash coffer, Del Mar Spa is considering three alternatives ofpaying dividend to its shareholders. Choices #1 and #2 are to pay adividend of $2 and $3 respectively. Choice #3 is paying nothing.Further assume that the price drop on ex date will be equal to thedividend per share. Your income tax on dividend income is 28%, and20% on capital gain. Which choice would you prefer? Compare theafter-tax capital gain and dividend income among three choices!

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3.8 Ratings (531 Votes)

We will analyze three choices individually Choice 1 Price one year ago 35 Current price 42 Dividend income 2 Tax on dividend income 28 and capital gain tax rate 20 Price after dividend distribution Current price dividend income 42 2 40 After tax capital gain Price after dividend distribution price one year ago1 capital gain See Answer

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Assume you purchased the stock of Del Mar Spa at $35 per shareone year ago, its current price is $42. Sitting on an enviable hugecash coffer, Del Mar Spa is considering three alternatives ofpaying dividend to its shareholders. Choices #1 and #2 are to pay adividend of $2 and $3 respectively. Choice #3 is paying nothing.Further assume that the price drop on ex date will be equal to thedividend per share. Your income tax on dividend income is 28%, and20% on capital gain. Which choice would you prefer? Compare theafter-tax capital gain and dividend income among three choices!