Taxes and Dividend Policy
After tax rate of return (%) 100 10. 0 100 10. 0
Total(div After cap gainTax -incometaxes) ( 0 12. 50 ) 2. 50 10 ( 10 5. 83 ) ( 5 1. 17 ) 9. 66
Tax on Cap Gain @ 20% .20 12.50 2.50 .20 5. 83 1. 17
Tax on div @ 50% 0 .50 10 5. 00
Pretax rate of return (%) 100 12. 5 100 16. 4Capital gain 12.50 5.83
Today's stock price 100 96.67
Total pretax payoff 112.50 112.50
Dividend 0 10Next year' s price 112.50 102.50(high^ dividend)Firm B
(no dividend)Firm A10010 96.679.6612.5 100 96.6715.83× = × =
+ + − = − − + =× = × =× =× = × =