You purchased a stock 6 months ago for $30 and the current price is $33.The firm is about to pay its first dividend (ever)of $3 in a few days.You will pay a 40% tax rate on dividends and a 20% tax rate on capital gains.What must the share price fall in order for you to be indifferent between selling the shares before or after the ex-dividend date?

Question

Quizplus · Accepted Answer

If you sell today,capital gain proceeds retained = 3 ´ (1-.2)= 2.40
If you receive the dividend,the dividend proceeds you retain = 3 ´ (1-.6)=1.80
Therefore,to be indifferent you must have .60 of net capital gain proceeds for your decision to sell after the ex-dividend date to be equal to selling before the ex-dividend date.
====> .6 = capital gain ´ (.8)===> capital gain = .75 ===> the share price must fall by 2.25

You Purchased a Stock 6 Months Ago for $30 and the Current