How much higher after-tax income the investor will get

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Question: Assume that the tax rate on capital gains is 15%, while the tx rate on dividend income is 20 %. An investor is comparing two options for the stock of ABC firm: I) receive $100 of dividend income now, II) get unrealized capital gains of $100 now which are left to grow with the firm for five years. The expected rate of return on the stock of ABC firm is 8%. The investor will invest his after-tax dividend income in ABC stock for five years. How much higher after-tax income the investor will get in five years under the capital gains option II than under the dividend income option I (i.e., difference of option II income over option I income)?

Reference no: EM131938445

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