CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Assume the marginal ordinary income tax for an investor is 40% but for capital gains it is 15%. What would the investor prefer: $100 in dividends or $80 in capital gains?
A. $100 in dividends.
B. $80 in capital gains.
C. The investor would be indifferent.
Explanation: After taxes the $100 dividend income is worth 100 (1 - 0.40)/(1 - 0.15) = $70.59. He would certainly prefer $80 in capital gains.

User Contributed Comments 3

User Comment
rjdelong is this the correct application of the formula? it seems the investor would have 80 x .85 = 68 as cap gain and 100 x .6 = 60 as dividend the way the question is phrased. The equation used above is for stocks going ex dividend so the price of the stock would drop by 70.59 if there were a 100 per share dividend... Am I wrong?
rjdelong I see that I am wrong, the formula is used this way.
rjdelong the drop in share price is equiv to a cap gain payout essentially, and $70 cap gain payout is worse than $80 obviously.
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