Taxes Homework Help

Taxes

The investor receives return on security in the form of dividend income and capital gains or losses. Accordingly. the lax liability of the investor is of two types: (i) tax on dividend income and (ii) tax on capital gains.  When both the types of income arts either free-of-tax or the are taxed at the same the CAPL results hold true whether company pay more or less dividends. However, i'n practice, capital gains are normally taxed at lower than dividend income. Moreover, capital gain tax is payable only when securities arc actually sold: the tax capital gains is deferred till the actual sale of the securities. The different tax treatment of dividend and capital gains means that with less dividend (and more capital appreciation), the investor's tax liability would be lower-an attribute unrecognized by the CAPM.

Suppose the investor is expected to have return of 10 per cent (consisting of a dividend 10 per cent and 10  per cent capital gain on initial value) by holding securities in Company X. Company Y is expected to provide dividend yield of 11 per cent and capital appreciation of 10 per cent of 14. per cent . Assume further that dividend income is taxed at 30 per cent and capital Rain at 20 per cent. These before tax return from company X's securities higher at 1~ per cent, the after-tax return (effectual return) is higher in the case of company Y at 11.25 per cent (Table 3.7)

Posted by: andy

Category

RISK AND RETURN

Tags

Share This