David Corporation has assets with a market value of $600 million, $80 million of which are cash. It has debt of $250 million, and 20 million shares outstanding. Assume perfect capital markets. 

(i) The current stock price is at $26. Do you agree? Explain it with calculation. 

(ii) If David Corporation spends $70 million as a share repurchase, the share price would be increased because the number of shares would be decreased. Do you agree? Explain it with calculation (Calculate the share price after the share repurchase).

(iii) If David Corporation distributes $70 million as cash dividend, then what is the Ex-Dividend Price per share of the stock? 

 

b) Assume that the dividend tax rate is 38%. The stock price of Ginny Corporation closed today at $30. Ginny Corporation would pay $4 special dividend per share, and tomorrow is the ex-dividend date. 

(i) Assume that there is no tax on capital gains. Calculate the expected stock price on tomorrow morning. 

(ii) Assume that the tax rate on capital gains is 34%. Calculate the effective dividend tax rate.

(iii) Assume that the tax rate on capital gains is 34%. Calculate the expected stock price on tomorrow morning.