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:

(P₀-P_X) /D= (1 -T_P) / (1 -T_G)

HereP₀is the price just before the stock goes ex,P_Xis the ex-dividend share price,Dis the amount of the dividend per share,T_Pis the relevant marginal personal tax rate on dividends, andT_Gis the effective marginal tax rate on capital gains.

a.IfT_P=T_G= 0, how much will the share price fall when the stock goes ex?(Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Share price declineD

b.IfT_P= 10 percent andT_G= 0, how much will the share price fall?(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price declineD

c.IfT_P= 10 percent and ifT_G= 15 percent, how much will the share price fall?(Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Share price declineD

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 30 percent, what does this model predict the change in the ex-dividend share price will be?(Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Share price declineD

Kaelea, Inc., has no debt outstanding and a total market value of $110,000. Earnings before interest and taxes, EBIT, are projected to be $8,800 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. The company is considering a $36,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,400 shares outstanding. Assume the companyhas a tax rate of 35 percent.

a.Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

EPSRecession$Normal$Expansion$

b.Calculate the percentage changes in EPS when the economy expands or enters a recession.(A negative answer shouldbe indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.)

%EPSRecession%Expansion%

Assume the company goes through with recapitalization.

c.Calculate earnings per share, EPS, under each of the three economic scenarios after the recapitalization.(Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

EPSRecession$Normal$Expansion$

d.Calculate the percentage changes in EPS when the economy expands or enters a recession.(A negative answer shouldbe indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

%EPSRecession%Expansion%