Hello We had this example in Corporate Finance My question: How come they dont have to pay tax of the Capital gains of 15%? in the example it says 4$ Million - 1.5$ Million = 2.5$ Milllion in Tax why is it no 4 + 1.5 =5.5 $ Million in Tax
Hello We had this example in Corporate Finance My question: How come they dont have to pay tax of the Capital gains of 15%? in the example it says 4$ Million - 1.5$ Million = 2.5$ Milllion in Tax why is it no 4 + 1.5 =5.5 $ Million in Tax
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Hello
We had this example in
My question:
How come they dont have to pay tax of the
in the example it says 4$ Million - 1.5$ Million = 2.5$ Milllion in Tax
why is it no 4 + 1.5 =5.5 $ Million in Tax
Transcribed Image Text:Issuing Equity to Pay a Dividend
Problem
Suppose a firm raises $10 million from sharcholders and uses this cash to pay them $10 million
in dividends. If the dividend is taxed at a 40% rate, and if capital gains are taxed at a 15% rate,
how much will sharcholders receive after taxes?
Solution
Sharcholders will owe 40% of $10 million, or $4 million in dividend taxes. Because the value
of the firm will fall when the dividend is paid, shareholders' capital gain on the stock will be
$10 million less when they sell, lowering their capital gains taxes by 15% of $10 million or $1.5
million. Thus, in total, sharcholders will pay $4 million – $1.5 million = $2.5 million in taxes,
and they will receive back only $7.5 million of their $10 million investment.
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