The IJK Corporations will pay a constant dividend of $2 per share per year in perpetuity. Assume all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in IJK is 12%.

What is the price of a share of IJK stock? (1 mark)

You notice that the stock price drop on the ex-dividend date is about the size of the dividend payment.

You find this relationship puzzling given that the tax disadvantage of dividends. Explain what might account for this stock price trend. (3 marks)

Assume that management makes a surprise announcement that IJK will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of IJK stock now? (1 mark)