1. Dragon X Corporation has assets with a market value of $400 million, $40 million of which are cash. It has debt of $150 million, and 8 million shares outstanding. Assume perfect capital markets.

a. What is Dragon X Corp.s current stock price?

b. If Dragon X distributes $20 million as a dividend, what will its share price be after the dividend is paid?

c. If instead, Dragon X distributes $20 million as a share repurchase, what will its share price be once the shares are repurchased?

d. What will the new market debt-equity ratio be after either transaction?

2. The Targaryen Corporation (TTC) commits to paying a constant dividend of $3 per share each year, in perpetuity. Suppose that another investment with the same level of systematic risk as TTCs shares has an expected return of 15%.

a. The personal income tax rate is 0%. What is the share price of TTC?

b. Now assume that all investors must pay a 30% tax on dividends. What is the share price of TTC in this case?

c. The capital gains tax is 15%. TTCs management makes a surprise announcement that TTC will no longer pay any dividends. Instead, TTC will use the same amount of cash it used to pay as dividends to repurchase stock (assume shares never run out). What is the price of a share of TTC now?

3. Suppose that all capital gains are taxed at a 20% rate, and that the dividend tax rate is 40%. Winterfell and Sons is currently trading for $25, and is about to pay a $3 special dividend.

a. What is Winterfell and Sons share price just after the dividend is paid?

b. Suppose Winterfell and Sons announces that it would do a share repurchase instead of the special dividend. What net tax savings per share would result from this decision for an investor?

c. What would happen to Winterfell and Sons share price upon the announcement of this decision?