a) Sarge plc has just announced that it intends to pay a dividend of 20p. You bought shares in the company earlier in the year when their price was 250p but this has now increased to 400p. You have decided to sell the shares but remain undecided whether to do so now or after the payment of the dividend. You are liable to capital gains tax at 15 per cent and income tax at 35 per cent. How much will the share price have to fall on the ex-dividend day for you to be indifferent between selling now or after the ex-dividend day?

b) Fillmore owns 500 shares in a company whose shares are trading at 25 per share. The company has announced that it intends paying a dividend of 3 per share. This investor would prefer the company to adopt a higher payout so as to receive a dividend of 5 per share. What action can the investor take to obtain the additional net cash inflow? Demonstrate that the investor will be just as well off if the company had paid a dividend of 5 per share.

c) With reference to your workings above, explain the concept of a home-made dividend under the Miller-Modigliani perfect markets view and how this maintains dividend irrelevancy.