Holding other factors constant, an increase in the capital gains tax rate will:
A) have more effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
B) have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.
C) have no effect on the valuations of stocks.C
D) have the same effect on the valuation of dividend-paying stocks and stocks with high growth prospects.

Question

Quizplus · Accepted Answer

Dividend-paying stocks are typically held by more risk-averse investors who prioritize income over growth. These investors are likely to be less responsive to changes in the capital gains tax rate because they are not focused on short-term capital gains. In contrast, investors in stocks with high growth prospects are more likely to be driven by potential capital gains, making them more sensitive to changes in the capital gains tax rate. Therefore, an increase in the capital gains tax rate is likely to have less effect on the valuation of dividend-paying stocks than on stocks with high growth prospects.

Holding Other Factors Constant, an Increase in the Capital Gains