The Targaryen Corporation (TTC) commits to paying a constant dividend of $3 per share each year, in perpetuity. Suppose that another investment with the same level of systematic risk as TTCs shares has an expected return of 15%.

a. The personal income tax rate is 0%. What is the share price of TTC?

b. Now assume that all investors must pay a 30% tax on dividends. What is the share price of TTC in this case?

c. The capital gains tax is 15%. TTCs management makes a surprise announcement that TTC will no longer pay any dividends. Instead, TTC will use the same amount of cash it used to pay as dividends to repurchase stock (assume shares never run out). What is the price of a share of TTC now?

3. Suppose Apple announces a $10/share special dividend. a. Suppose first that Apples share price increases upon the announcement of the dividend. Give two reasons that may explain this fact.

b. Now suppose that Apples share price decreases upon the announcement of the dividend. Give two reasons that may explain this fact.

c. Irrespective of the change in price on the announcement date, by how much do you expect Apples share price to drop after the ex-dividend date?