Question
Hong Kong has an unusual tax system. Dividends and capital gains are not taxable. The Deng Corporation currently pays a quarterly dividend of HK$5 per
Hong Kong has an unusual tax system. Dividends and capital gains are not taxable. The Deng Corporation currently pays a quarterly dividend of HK$5 per share. It has 5 million shares outstanding at a price of HK$267.
a) What will happen to the share price on the first day when registered owners are no longer eligible to receive the quarterly dividend?
b) What will happen to the share price if Deng announces that in the future it will cut quarterly dividends by HK$2 per share and use the cash to repurchase shares instead?
c) What if Deng keeps the dividend at HK$5 but uses excess cash to repurchase shares in the open market at the current market price of HK$267?
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