Question: What are direct costs and indirect cost of financial distress? What are the impacts of each cost on firm's value?
Suppose you are a rational investor and looking at the following tax rates:
|
Year
|
Capital Gains
Rate
|
Ordinary Income
Rate
|
Dividend
Rate
|
|
1997-2000
|
20%
|
40%
|
40%
|
|
2001-2002
|
20%
|
39%
|
39%
|
|
2003-
|
15%
|
35%
|
15%
|
The current tax rates are set to expire in 2008 unless Congress extends them. The tax rates shown are for financial assets held for one year. For assets held less than one year, capital gains are taxed at the ordinary income tax rate (currently 35% for the highest bracket); the same is true for dividends if the assets are held for less than 61 days. What is the effective dividend tax rate for a buy and hold individual investor in 2006?