Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed

image text in transcribed

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: (P0PX)/D=(1TP)/(1TQ Here P0 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? PX P0 D b. If TP=16 percent and TG=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.) b. If TP=16 percent and TG=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.) c. If TP=17 percent and TG=29 percent, how much will the share price fall? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 321616.) d. Suppose the only owners of stock are corporations. Recall that corporations get at least a 50 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 22 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.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Financial Management

Authors: Jeff Madura

7th Edition

0324071744, 978-0324071740

More Books

Students also viewed these Finance questions

Question

Understand the basic theories and concepts of OD

Answered: 1 week ago