What capital gain must a non-dividend-paying stock attain in order for a corporate investor in the 35% tax bracket to be indifferent to a stock paying an 8% dividend but having no capital gain? Assume 30% tax rate on dividends.

Question

Quizplus · Accepted Answer

To be indifferent, the after-tax return from the capital gain must equal the after-tax return from the dividend. The after-tax dividend yield is 8% * (1 - 0.30) = 5.6%. For the capital gain, the after-tax return is (1 - 0.35) * capital gain. Setting these equal gives 0.65 * capital gain = 5.6%, solving for capital gain gives approximately 11.02%.

What Capital Gain Must a Non-Dividend-Paying Stock Attain in Order