Question
Supreme Roasters Inc. only pays dividends to its shareholders. The current share price is $200, the company has 15 million shares outstanding, $300 million in
Supreme Roasters Inc. only pays dividends to its shareholders. The current share price is $200, the company has 15 million shares outstanding, $300 million in outstanding debt, and $150 million in excess cash. Assume that the company will use all of its excess cash to pay its shareholders a dividend. For simplicity, also assume that the ex-date is tomorrow and that the dividend will be paid on the ex-date. Assume that market are not perfect, and that the only market imperfection are taxes. If the tax rate on dividends is 10% and the tax rate on capital gains is 20%, what will happen to the share price on the ex-date? Select the best one.
I. | The share price will decline to $195. | |
II. | The share price will decline to $188.75. | |
III. | Nothing, the share price will remain at $200. | |
IV. | The share price will decline to $191.11. | |
V. | The share price will decline to $190. |
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