Question

The common stock of Big Marvin Treats has a total return of 10.25 percent, a stock price of $28.75, and recently paid an annual dividend of $1.65. What is the capital gains rate if the company maintains a constant dividend?

Answer 1

4.52%

Step-by-step explanation:

Annual dividend = $1.65

Stock price = $28.75

Total return on common stock = 10.25 percent

Therefore,

Required return of dividend:

= Annual dividend ÷ Stock price

= $1.65 ÷ $28.75

= 0.0573

= 5.73%

Capital gain rate:

= Total return - Required return of dividend

= 10.25% - 5.73%

= 4.52%

Hence, the capital gains rate is 4.52% if the company maintains a constant dividend.