| What is the average investment in accounts receivable as shown on the balance sheet? | As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex-dividend price: |
| (PO PX) / D = (1 TP) / (1 TG) |
| Here PO is the price just before the stock goes ex, PX is the ex-dividend share price, D is the amount of the dividend per share, TP is the relevant marginal personal tax rate on dividends, and TG is the effective marginal tax rate on capital gains. | | (a) | If TP = TG = 0, how much will the share price fall when the stock goes ex? |
| (b) | If TP = 20 percent and TG = 0, how much will the share price fall? (Round your answer to 2 decimal places (e.g., 32.16).) |
| (c) | If TP = 20 percent and if TG = 30 percent, how much will the share price fall? (Round your answer to 4 decimal places (e.g., 32.1616).) |
| (d) | Suppose the only owners of stock are corporations. Recall that corporations get at least a 70 percent exemption from taxation on the dividend income they receive, but they do not get such an exemption on capital gains. If the corporation's income and capital gains tax rates are both 40 percent, what does this model predict the change in the ex-dividend share price will be? (Round your answer to 4 decimal places (e.g., 32.161).) |
| A bank offers your firm a revolving credit arrangement for up to $63 million at an interest rate of 1.46 percent per quarter. The bank also requires you to maintain a compensating balance of 6 percent against the unused portion of the credit line, to be deposited in a noninterest-bearing account. Assume you have a short-term investment account at the bank that pays 0.87 percent per quarter, and assume that the bank uses compound interest on its revolving credit loans. |
| Required: | | (a) | What is your effective annual interest rate (an opportunity cost) on the revolving credit arrangement if your firm does not use it during the year? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) |
| (b) | What is your effective annual interest rate on the lending arrangement if you borrow $37 million immediately and repay it in one year? (Do not include the percent sign (%).Round your answer to 2 decimal places (e.g., 32.16).) |
| (c) | What is your effective annual interest rate if you borrow $63 million immediately and repay it in one year? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).) | |
