Answer to Question #134427 in Financial Math for Syed Mayenuddin Huq

Question

Mr. Karim bought 100 shares of Beximo Pharmaceutical Limited (BPL) last year at Tk. 80 each. The share is currently trading at Tk. 100 each. The company declared Tk. 10 a share dividends recently. Mr. Karim has to pay 30% Tax on his income.

Calculate Mr. Karim's after-tax dividend from BPL.

b. Now assume that BPL did not declare any dividends. Mr. Karim realized Tk. 10 a share by selling a part of his holding of BPL shares as homemade dividends. If capital gains is taxed at 30%, find out what would be Mr. Karim's after-tax homemade dividends.

Answer 1

a

After tax return = PercentageReturn X (1 - AfterTax)

dividend = Tk.10

rate of dividend = dividend/facevalue x 100%

= 10/80 x 100%

= 12.5%

so AfterTaxReturn = 12.5 x (1-0.3)

= 8.75%

b

rate of dividend = 10/100 x 100%

= 10%

so AfterTaxReturn = 10 x (1-0.3)

= 10%