Problem 17-15 on Distribution to Shareholders Based on Chapter 17 Payout Policy.

Suppose that all capital gains are taxed at a 25% rate and that the dividend tax rate is 50%. Arbuckle Corporation is currently trading for $30 and is about to pay a $6 special dividend.

a. Absent any other trading frictions or news, what will its share price be just after the dividend is paid?

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend.

b. What net tax savings per share for an investor would result from this decision?

c. What would happen to Arbuckles stock price upon the announcement of this change?