21.

a. The Horner Pie Company pays a quarterly dividend of $1. Suppose that the stock price is expected to fall on the ex-dividend date by $.90. Would you prefer to buy on the with-dividend date or the ex-dividend date if you were (i) a tax-free investor, (ii) an investor with a marginal tax rate of 40% on income and 16% on capital gains?

b. In a study of ex-dividend behavior, Elton and Gruber 47 estimated that the stock price fell on the average by 85% of the dividend. Assuming that the tax rate on capital gains was 40% of the rate on income tax, what did Elton and Gruber’s result imply about investors’ marginal rate of income tax?

c. Elton and Gruber also observed that the ex-dividend price fall was different for highpayout stocks and for low-payout stocks. Which group would you expect to show the larger price fall as a proportion of the dividend?

d. Would the fact that investors can trade stocks freely around the ex-dividend date alter your interpretation of Elton and Gruber’s study?

e. Suppose Elton and Gruber repeated their tests for 2009, when the tax rate was the same on dividends and capital gains. How would you expect their results to have changed?