Question
Question 7 ABC has just announced that is is planning to pay a dividend of $3.9 per share. Before the announcement the share price of
Question 7
ABC has just announced that is is planning to pay a dividend of $3.9 per share. Before the announcement the share price of ABC was $37.7. Assume that the tax rate on capital gains is 15%, the tax rate on dividends is 3%. By how much will you expect the share price of ABC to change on the ex-date. Round your answers to two decimals (do not include the $-symbol in your answer). If you expect a positive change (share price will increase) enter a positive number. If you expect a negative change (share price will decline) enter a negative number.
Question 8
You are a consultant that has been hired to recommend a payout policy for UBT Corp. UBTs shareholders are almost buy and hold individual investors as well as one-year individual investors. No shareholder of UBT owns more than 20% of all outstanding shares. You have compiled a table with the current tax rates that different types of investors might face (see below). With the information provided, how would you recommend that UBT structure its payout policy? Assume that taxes are the only market imperfection. Select the best answer.
Investor Type | Tax Rate on Dividends | Tax Rate on Capital Gains |
Buy and hold individual investor | 20% | 0% |
One-year individual investor | 20% | 20% |
Pension fund | 0% | 0% |
Corporation with less than 20% ownership | 10.5% | 21% |
I. | The firm should pay dividends and repurchase shares in equal amounts. | |
II. | The firm should only repurchase shares. | |
III. | The firm should only use dividends. | |
IV. | How the firm structures its payout policy is irrelevant because investors are indifferent between dividends and repurchases. |
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