An Investor Has a 38% Ordinary Income Tax Rate and a 20

An investor has a 38% ordinary income tax rate and a 20% long-term capital gains tax rate. The investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm. The stock price is currently $30 per share. If the firm does not pay the dividend, the share price will rise. If it pays the dividend, the share price will stay the same. By how much must the share price rise if the dividend is not paid in order to make the investor indifferent between receiving the dividend or not?

A) $1.00
B) $0.59
C) $0.78
D) $0.97
E) $0.50 Change in share price required = [1 * (1 - 0.38) ]/(1 - (0.20) = $0.78