Firm Beta is all-equity financed. The total market value of the firm currently is 100,000, and there are 2,000 shares outstanding.

1. The firm has declared 5 per share dividend. The stock will go ex-dividend tomorrow. At what price will the stock sell today? Tomorrow? Ignore taxes. [6 marks]

2. Now assume that the tax rate on dividend income is 30%, and the tax rate on capital gains is zero. Taking account of the taxation of the dividends, at what price will the stock sell today? [4 marks]

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

3. What will be the stock price before and after the repurchase? [5 marks]

4. Suppose an investor who holds 200 shares sells 20 of her shares back to the firm. If there are no taxes on dividends or capital gains show that she would be indifferent between the repurchase and the dividend. [5 marks]

5.Show that if dividends are taxed at 30% and capital gains are not taxed, the value of the firm is higher if it pursues the share repurchase instead of the dividend. [5 marks]