Stock A has a dividend yield of 8 but no capital gain Stock

Stock A has a dividend yield of 8% but no capital gain. Stock B offers a capital gain but no dividend. If a corporate investor in the 35% tax bracket earns the same after-tax return from the two stocks, what capital gain does B offer? Multiple Choice 8.00% 9.29% 11.02% 12.31%

Solution

Correct answer is option D.12.31%

Since, from stock A,investor would get a dividend yield of 8% which is not taxable in the hand of investor, same 8% would be the after tax return from stock B as well.

So capital gain from B = 8/(1-.35) =12.31%