Can someone help explain the following statement with numbers possibly?:
If the marginal tax rate on dividends is higher than the marginal tax rate on capital gains, the decreae in stock price when the share goes ex-dividend should be less than the amount of the dividend?
Ok. I’m referring to a sum given in Schweser,
A firm is planning to declare $12 in Div. Tax = T cg -15% & Td- 30%. Find out the Exp drop in Price.
D(1-Td)/(1-Tcg)= 12*.7/.85 = $9.88.
Here you can see that drop in Price is less than the amount of Div. Why? Coz, Here you would be indifferent between $12 in Div and 9.88 in C G. **Also Tax on Div is higher than Tax on C G, investor prefer C G and Hence 1 of Div is worth less than $ 1 in C G.**
Hope it helps.