You currently work for DEC Ltd, a large Australian firm whose cash flows have historically been stable. Due to an excellent one-off investment opportunity, DEC has experienced a huge increase in its cash flow this year. The CEO of DEC is ecstatic this is fantastic, he says we can finally increase our dividend. You point out to the CEO that the high cash flow this year is not likely to continue into the future. No problem, he replies, we can just cut the dividend next year. Our shareholders will understand that this year is just different. (a) If DEC does increase dividends this year, but then decreases dividends the following year, what effect will this have on DEC's share price in each of the two years? Explain the rationale for the price change. (2 marks) (b) Instead of increasing the dividends this year, what alternative can you suggest to the CEO? Why do you think this is a better alternative than increasing dividends? (2 marks) (c) Sam is an investor who holds some of DEC Ltd's stock. Sam receives $100 of fully franked dividends from DEC Ltd. If Sam is an Australian resident for tax purposes and her tax rate is 48%, how much additional personal tax (beyond the tax already paid at the corporate level) will she have to pay on these dividends? The corporate tax rate in Australia is 30%. (3 marks) You currently work for DEC Ltd, a large Australian firm whose cash flows have historically been stable. Due to an excellent one-off investment opportunity, DEC has experienced a huge increase in its cash flow this year. The CEO of DEC is ecstatic this is fantastic, he says we can finally increase our dividend. You point out to the CEO that the high cash flow this year is not likely to continue into the future. No problem, he replies, we can just cut the dividend next year. Our shareholders will understand that this year is just different. (a) If DEC does increase dividends this year, but then decreases dividends the following year, what effect will this have on DEC's share price in each of the two years? Explain the rationale for the price change. (2 marks) (b) Instead of increasing the dividends this year, what alternative can you suggest to the CEO? Why do you think this is a better alternative than increasing dividends? (2 marks) (c) Sam is an investor who holds some of DEC Ltd's stock. Sam receives $100 of fully franked dividends from DEC Ltd. If Sam is an Australian resident for tax purposes and her tax rate is 48%, how much additional personal tax (beyond the tax already paid at the corporate level) will she have to pay on these dividends? The corporate tax rate in Australia is 30%