Investor deferring capital gains taxes

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Reference no: EM13963143

Southern Rail has just declared a dividend of $1. The average investor in Southern Rail faces an ordinary tax rate of 50 percent. Although the capital gains rate is also 50 percent, 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 percent 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 cash flows is 10 percent.)

Reference no: EM13963143

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