Reference no: EM131690356

Question: Southern Rail has just declared a dividend of $ 1. The average investor in Southern Rail faces an ordinary tax rate of 50%. While the capital gains rate is also 50%, it is believed that the investor gets the advantage of deferring this tax until future years (The effective capital gains rate will therefore be 50% discounted back to the present). If the price of the stock before the ex-dividend day is $10 and it drops to $9.20 by the end of the ex-dividend day, how many years is the average investor deferring capital gains taxes? (Assume that the opportunity cost used by the investor in evaluating future cashflows is 10%.)