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RedHat plc is currently trading at 55 per share and it is about to pay a special dividend of 10 per share. Suppose that all

  1. RedHat plc is currently trading at 55 per share and it is about to pay a special dividend of 10 per share. Suppose that all capital gains are taxed at 15% rate, and that the dividend tax rate is 40%.

  1. Calculate the effective dividend tax rate.

[5 marks]

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

[5 marks]

  1. Suppose that, instead of paying special dividends, RedHat decided to use the excess cash to repurchase its shares. Calculate the net tax saving per share for an investor that would result from this change of payout decision.

[5 marks]

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