Question

You purchased CSH stock for $40 and it is now selling for $50. The company has announced that it plans a $10 special dividend.

1. Assuming 2010 tax rates, if you sell the stock or wait and receive the dividend, will you have different after-tax income?

2. If the capital gains tax rate is 20% and the dividend tax rate is 40%, what is the difference between the two options in part (a)?

Answer 1

a). In 2010, the capital gains tax rate is 15%, and the dividend tax rate is 15%. The tax on a $10 capital gain is $1.50, and the tax on a $10 special dividend is $1.50. The after-tax income for both will be $8.50.

b). If the capital gains tax rate is 20%, the tax on a $10 capital gain is $2.00, and the after-tax income is $8.00.

If the dividends tax rate is 40%, then the tax on a $10 special dividend is $4.00, and the after-tax income is $6.00. The difference in after-tax income is $2.00.