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CMA Intermediate · Financial Management and Business Data Analytics · Dividend Decisions and Dividend Theories

A resident investor in the 30% tax bracket receives a dividend of ₹10 per share from Sundaram Ltd., taxed at slab rate (ignore surcharge and cess). The same investor alternatively expects the company to retain the amount, so the share price rises by ₹10, and the gain is taxed at 12.5% on sale. What is the after-tax benefit per share under the dividend route and the retention route respectively?

The dividend route gives ₹10 less 30% tax, which is ₹7.00. The retention route gives a ₹10 price gain less 12.5% capital gains tax, which is ₹8.75. So retention is better for this investor, consistent with tax preference theory.

  1. A₹7.00 and ₹8.75Correct
  2. B₹8.75 and ₹7.00
  3. C₹7.00 and ₹7.00
  4. D₹8.75 and ₹8.75

Explanation

Dividend route: 10 × (1 − 0.30) = ₹7.00. Retention route: 10 × (1 − 0.125) = ₹8.75. The second option swaps the rates, and the others wrongly apply the same rate to both routes.

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