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EsIMPLE is a firm with a stock price of $50 per share. The firm has decided to not pay the usual...

Question:

EsIMPLE is a firm with a stock price of $50 per share. The firm has decided to not pay the usual dividend of $2.50 per share. Kelly, a shareholder on the record of EsIMPLE, has 400 shares that she purchased two years ago for $35 per share. Kelly needs cash and decides to create for herself the $2.50 dividend that she would have received as a shareholder. Which of the following comes closest to the amount that Kelly gets to keep from this transaction of creating the dividend if the tax rate on capital gains is 20%? a. $800 b. $940 c. $840 d. $760 e. $1,000

Home Made Dividends:

If a company does not pay dividends, an investor with a preference for dividends can create home made dividends by selling a portion of his/her stock. In most countries the tax on capital gains is smaller than the tax on dividends.

Answer and Explanation:

Dividends needed = 2.50 * 400 = $1,000

To receive $1,000, she would need to sell 20 shares at $50 each.

The capital gains tax is calculated on the...

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Homemade Dividends: Definition & Examples

from Finance 101: Principles of Finance

Chapter 16 / Lesson 2
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