John Madden is considering two investments of similar risk. Investment A is a stock that is expected to pay a dividend of $100 at the end of each year for two years, but no dividend in the third year. You expect to sell Investment A after three years for a capital gain of $400. Investment B is a stock that is not expected to pay any dividends, but you expect to sell the stock at the end of three years for a capital gain of $600. John is wealthy and is in the 50% tax bracket. Dividends are taxed at the personal tax rate, but capital gains are taxed at 40% of the personal tax rate. Given a discount rate of 10% for both investments, which would you recommend.

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The Answer of John Madden is considering two investments of similar risk. Investment A is a stock that is expected to pay a dividend of $100 at the end of each year for two years, but no dividend in the third year. You expect to sell Investment A after three years for a capital gain of $400. Investment B is a stock that is not expected to pay any dividends, but you expect to sell the stock at the end of three years for a capital gain of $600. John is wealthy and is in the 50% tax bracket. Dividends are taxed at the personal tax rate, but capital gains are taxed at 40% of the personal tax rate. Given a discount rate of 10% for both investments, which would you recommend.

John Madden Is Considering Two Investments of Similar Risk