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?

Question

Quizplus · Accepted Answer

To find the capital gain required for indifference, set the after-tax return of the non-dividend-paying stock equal to the after-tax return of the dividend-paying stock: 7.16% = 0.65 * capital gain. Solving for the capital gain gives approximately 11.02%.

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