-If the investor’s marginal tax rate on dividends is > their marginal tax rate on cap gains , the decrease in price when the stock goes ex-dividend should be < amount of the dividend
-If the investor’s marginal tax rate on dividends is < their marginal tax rate on Cap Gains , the decrease in price when the stock goes ex-dividend should be > amount of the dividend
To me this concept has two main ideas behind it: tax avoidance and expected future gains. If my tax rate on dividend is higher than my tax on cap gains, then I would rather get rid of the stock before ex-div date so that I don’t have to pay the higher tax; however if I expect the stock to appreciate more, exceeding the tax paid on the dividend, then I will chose to keep it. I’m assuming this is illustrated by the equation: Pw−Px=D* (1−TD/1−TCG) making it the indifference line? Am I understanding this correctly? The whole concept seems to be more about the shareholder’s end wealth rather than the actual tax. At first, the outcomes of the two scenarios seemed opposite to me.