Chung Cheng is all-equity-financed. The total market value of the firm currently is $120,000, and there are 3,000 shares outstanding.

a. Ignore taxes. The firm has declared a $5 per share dividend. The stock will go ex-dividend tomorrow. At what price will the stock sell tomorrow?

b. Now assume that the tax rate on all dividend income is 30% and the tax rate on capital gains is 15%. What will be the ex-dividend price?

Now suppose that instead of paying a dividend, Chung Cheng plans to repurchase $10,000 worth of stock.

c. What will be the stock price before the repurchase?

d. What will it be after the repurchase?

e. Does the existence of taxes tend to favor dividends or repurchases?