dividendss

Question

You are considering three stocks with the following expected dividend yields and capital gains: 

 

                                                 dividend yields                         capital gain

                     A                              14%                                         0%

                     B                               8%                                          6%

                     C                               0%                                         14%

 

a.)  What is the expected return on each stock?

b.)  How may transactions costs and capital gains taxes affect your choices among the three securities?

Answer 1

ASSUME THE DIVIDENDS ARE PAID ANNUALLY AFTER THE CAPITAL GAIN IS ADDED TO THE STOCK VALUE.( HOW THE DIVIDENDS ARE PAID IS NOT SPECIFIED.)

 

RETURNS

                dividend yields          capital gain   TOTAL RETURN

A                 14%                         0%                14%
B                   8%                         6%                6% +(8% * 1.06) = 6% + 8.48% = 14.48%
C                   0%                       14%                14%

 

COSTS*

A   NO CAP GAINS TAX, TX COST ON DIVIDENDS IF DIVIDENDS ARE PAID OUT TO STOCK HOLDER IMMEDIATELY OTHERWISE TAXED WHEN STOCK SOLD

B   CAP GAINS TAX WHEN STOCK IS SOLD, TX COST ON DIVIDENDS IF DIVIDENDS ARE PAID OUT TO STOCK HOLDER IMMEDIATELY OTHERWISE TAXED WHEN STOCK SOLD

C   CAP GAINSTAX WHEN STOCK IS SOLD, NO DIVIDEND COSTS

 

* CAP GAIN TAX REALIZED IN YEAR STOCK IS SOLD

 

NOTE:  THE MANNER OF HOW AND WHEN DIVIDENDS ARE PAID AND WHEN COSTS ARE ANTICIPATED ARE DEPENDENT ON WHEN THE STOCK IS SOLD.    MORE INFORMATION WOULD BE HELPFUL.