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QUESTION

Does capital gain represent cost to the firm. Would you explain in detail the attached picture.

dividends and capital gains. These dividends and capital gains represent costs to thefirm. It is easier to see this for dividends. Any dividend paid to a new shareholder iscash that cannot be paid to an old shareholder. But capital gains also represent a costto the firm. Appreciation in the value of a firm’s stock is shared by all stockholders. Ifpart of the capital gain goes to new stockholders, only the remainder can be capturedby the old stockholders. In other words, the new shareholders dilute the capital gainof the old shareholders. More will be said on this important point a little later.

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