Return to the Skyhook example. Suppose that Skyhook pays no dividend so that the
ID: 2805177 • Letter: R
Question
Return to the Skyhook example. Suppose that Skyhook pays no dividend so that the share price remains at $40 and you decide to create a dividend by selling ten shares of Skyhook stock. If you bought the stock years ago for $20 per share, and if the capital gains tax rate is 20%, how much of the sales proceeds do you get to keep? {2 ARS units if correct, 1 unit for any other answer} A. $240 B. $260 C. $280 D. $300 E. $320 106 Copyright Lacey Modern Corporate Finance, Fall Semester 2017 Page 106 (9) Tax On Dividends Versus Capital Gains Return to the Skyhook example. Suppose that Skyhook pays no dividend such that the share price remains at $40. You decide to create a dividend by selling 10 shares of stock. If you originally bought the stock $45 per share, and if the capital gains tax rate is 20%, how much of the proceeds of the sale of one share of stock do you get to keep? {2 ARS units if correct, 1 unit for any other answer} A. $240 B. $280 C. $320 D. $360 E. $400
Explanation / Answer
1.
Sale price = $40 per share
Number of share sale = 10
Total sale value = $40 × 10
= $400.
Purchase price = $20 × 10
= $200.
Capital gain = $400 - $200
= $200.
Tax rate on capital gain = $20.
Net proceed received = $400 × (1 - 20%)
= $320.
Net proceed you receive is $320.
Option (E) is correct answer.
2.
Sale price = $40 per share
Number of share sale = 10
Total sale value = $40 × 10
= $400.
Purchase price = $45 × 10
= $450.
Capital gain = $400 - $450
= -$50.
So, investor has incured capital loss of sale of stock., So not tax would be levied on sale price. So, total amount he get from sale is the sale value that is $400.
Option (E) is correct answer.
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