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:

(P₀P_X) /D= (1 T_P) / (1 T_G)

HereP₀is the price just before the stock goes ex,P_Xis the ex-dividend share price,Dis the amount of the dividend per share,T_Pis the relevant marginal personal tax rate on dividends, andT_Gis the effective marginal tax rate on capital gains.

a.IfT_P=T_G= 0, how much will the share price fall when the stock goes ex?

Share price decline = ___.85_D b.IfT_P= 10 percent andT_G= 0, how much will the share price fall? Share price decline = ____.9__D c.IfT_P= 10 percent and ifT_G= 20 percent, how much will the share price fall?

Share price decline= _______D

d.Suppose the only owners of stock are corporations. Recall that corporations get at least a 70 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 35 percent, what does this model predict the change in the ex-dividend share price will be?

Share price decline = _______D