CF Case 34: The Wm. Wrigley Jr. Company

What is your dividend tax rate if you earn an annual income of $150,000?

• 27.5%

• 30.5%

• 35.5%

• 39.1%

What causes Td* to differ across investors?

• Varying income levels

• Differing investment horizons

• Tax jurisdiction

• Type of investment account

If you earn an annual income of $60,000 and have an investment horizon of 3 years, which payout policy would you prefer?

• Share repurchase

• Dividends

• Indifferent

Answer explanation

An annual income of $60,000 results in a marginal income tax rate of 27.5%

Since dividend tax = marginal income tax rate = 27.5%, and investment horizon = 3 years, the corresponding capital gains tax = 20.0%

Thus, an investor of this profile would prefer a share repurchase

If you earn an annual income of $40,000 and have an investment horizon of 8 months, which payout policy would you prefer?

• Share repurchase

• Dividends

• Indifferent

Answer explanation

An annual income of $40,000 results in a marginal income tax rate of 27.5%

Since dividend tax = marginal income tax rate = 27.5%, and investment horizon = 8 months, the corresponding capital gains tax = 27.5%

Thus, an investor of this profile would be indifferent between both options

Assuming that you have an annual income of $150,000, and an investment horizon of 5.5 years, what is your effective dividend tax rate?

• 9.4%

• 13.1%

• 19.4%

• 23.9%

Answer explanation

An annual income of $150,000 results in a marginal income tax rate of 35.5%

Since dividend tax = marginal income tax rate = 35.5%, and investment horizon = 5.5 years, the corresponding capital gains tax = 20.0%

As such, Td*

= (0.355 - 0.20)/(1 - 0.20)

= 0.19375 or 19.4%

Assuming that you have an annual income of $110,000 and an investment horizon of 3 years, what is your effective dividend tax rate?

• 9.4%

• 13.1%

• 19.4%

• 23.9%

Answer explanation

An annual income of $110,000 results in a marginal income tax rate of 30.5%

Since dividend tax = marginal income tax rate = 30.5%, and investment horizon = 3 years, the corresponding capital gains tax = 20.0%

As such, Td*

= (0.305 - 0.20)/(1 - 0.20)

= 0.13125 or 13.1%