Suppose that Lisa owns stock in Avangard General (AG) that pays a quarterly dividend of $0.20 per...

Question:

Suppose that Lisa owns stock in Avangard General (AG) that pays a quarterly dividend of $0.20 per share. On January 1, 2016, AG's price was $40.00 per share, but by April 1, 2016, its price rose to $45.00 and then ended the year at $50.00 per share. Fill in the cells in the following table by calculating the dividend yield and the capital-gains yield for the first quarter of 2016 and the whole year:

Dividend Yield % Capital Gains Yield %
First Quarter
Annual

Lisa also must pay taxes:

If she buys more shares
On gains that have been accrued but not yet realized
On realized capital gains

At the end of the year, Lisa has to pay taxes on her capital gains. Assume that the tax rate is 20% and the inflation rate is 5%. Calculate Lisa's taxes.

Dividend Yield:

The dividend yield compares the dividend of the stock with the existing share price. This ratio is calculated by dividing the annual dividend of the stock with the existing market price of the stock.

Answer and Explanation:

Information:

Dividend = $0.20 per share

Price rose to = $45

Price at end of year = $50 per share

AG's price = $40 per share

Tax rate = 20%

Inflation rate = 5%

Term = quarterly = 4

Finding:

{eq}First \ quarter \ dividend \ yield \ = \ \dfrac{Dividend}{Price \ rose \ to} \ \times \ 100 \\ First \ quarter \ dividend \ yield \ = \ \dfrac{0.20}{45} \ \times \ 100 \\ First \ quarter \ dividend \ yield \ = \ 0.44\% {/eq}


{eq}Annual \ Dividend \ yield \ = \ \dfrac{Dividend \ \times \ Term}{Price \ at \ end \ of \ year} \ \times \ 100 \\ Annual \ Dividend \ yield \ = \ \dfrac{0.20\ \times \ 4}{50} \ \times \ 100 \\ Annual \ Dividend \ yield \ = \ 1.6\% {/eq}


{eq}First \ quarter \ capital \ gain \ yield \ = \ \dfrac{Price \ rose \ to \ - \ AG's \ price}{AG's \ price} \ \times \ 100 \\ First \ quarter \ capital \ gain \ yield \ = \ \dfrac{45 \ - \ 40}{40} \ \times \ 100 \\ First \ quarter \ capital \ gain \ yield \ = \ 12.5\% {/eq}


{eq}Annual \ Capital \ Gain \ yield \ = \ \dfrac{Price \ at \ end \ of \ year \ - \ AG's \ price}{AG's \ price} \ \times \ 100 \\ Annual \ Capital \ Gain \ yield \ = \ \dfrac{50 \ - \ 40}{40} \ \times \ 100 \\ Annual \ Capital \ Gain \ yield \ = \ 25\% {/eq}


Lisa must pay taxes on realized capital gains.

Capital gain per share year-end = Price at the end of the year - AG's price

Capital gain per share year-end = 50 - 40

Capital gain per share year-end = 10


Taxes = Tax rate * Capital gain per share year-end

Taxes = 20% * 10

Taxes = $2 per share

Taxes @ 20% is $2 per share has to be paid as capital gain taxes


Learn more about this topic:

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What Is Dividend Yield? - Definition & Calculation

from Corporate Finance: Help & Review

Chapter 2 / Lesson 10
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