Question 4 [10 marks] Waytt Oil is currently trading for $50 per share. The firm has 2 million shares outstanding, $10 million excess cash and no debt. The board of directors of Waytt Oil has just announced that it will use the excess cash to pay a special cash dividend. Suppose that all capital gains are taxed at a 15% rate, and that cash dividends are taxed at a 30% rate. Assume that there are no other market imperfections except taxes. (1) Calculate the effective dividend tax rate for investors in Waytt Oil. Explain what does the effective dividend tax rate mean for Waytt's shareholders? (ii) If Waytt Oil's shareholders could not make any profits by selling their shares either just before or just after the ex-dividend date, what would be the share price just after the ex-dividend date? (iii) An investor purchased 1,000 shares of Waytt Oil several days before the dividend announcement date at the price of $42 per share. If the investor firmly predicts that the ex-dividend price is $45 per share and takes some transactions to benefit from the investor's prediction, what is the net profit (that is, the net income after all taxes) of this investors (iv) Suppose that Waytt Oil made a surprise announcement that it would use the excess cash to conduct a share repurchase rather than pay a special cash dividend, what is the firm's share price after the share repurchase? (v) Suppose that Waytt Oil made a surprise announcement that it would use the excess cash to conduct a share repurchase rather than pay a special cash dividend, what is the net tax savings for a shareholder who sells 1,000 shares of Waytt Oil following this announcement? Question 4 [10 marks] Waytt Oil is currently trading for $50 per share. The firm has 2 million shares outstanding, $10 million excess cash and no debt. The board of directors of Waytt Oil has just announced that it will use the excess cash to pay a special cash dividend. Suppose that all capital gains are taxed at a 15% rate, and that cash dividends are taxed at a 30% rate. Assume that there are no other market imperfections except taxes. (1) Calculate the effective dividend tax rate for investors in Waytt Oil. Explain what does the effective dividend tax rate mean for Waytt's shareholders? (ii) If Waytt Oil's shareholders could not make any profits by selling their shares either just before or just after the ex-dividend date, what would be the share price just after the ex-dividend date? (iii) An investor purchased 1,000 shares of Waytt Oil several days before the dividend announcement date at the price of $42 per share. If the investor firmly predicts that the ex-dividend price is $45 per share and takes some transactions to benefit from the investor's prediction, what is the net profit (that is, the net income after all taxes) of this investors (iv) Suppose that Waytt Oil made a surprise announcement that it would use the excess cash to conduct a share repurchase rather than pay a special cash dividend, what is the firm's share price after the share repurchase? (v) Suppose that Waytt Oil made a surprise announcement that it would use the excess cash to conduct a share repurchase rather than pay a special cash dividend, what is the net tax savings for a shareholder who sells 1,000 shares of Waytt Oil following this announcement
