In: Finance
As discussed in the text, in the absence of market imperfections
and tax effects, we would expect the share price to decline by the
amount of the dividend payment when the stock goes ex dividend.
Once we consider the role of taxes, however, this is not
necessarily true. One model has been proposed that incorporates tax
effects into determining the ex-dividend price:
(P0 – PX) / D = (1
– TP) / (1 – TG)
Here P0 is the price just before the stock goes
ex, PX is the ex-dividend share price,
D is the amount of the dividend per share,
TP is the relevant marginal personal tax rate
on dividends, and TG is the effective marginal
tax rate on capital gains.
a. If TP =
TG = 0, how much will the share price fall when
the stock goes ex? (Do not round intermediate calculations
and round your answer to the nearest whole number, e.g.,
32.)
Share price decline
D
b. If TP = 20 percent
and TG = 0, how much will the share price fall?
(Do not round intermediate calculations and round your
answer to 2 decimal places, e.g., 32.16.)
Share price decline
D
c. If TP = 20 percent and if
TG = 20 percent, how much will the share price
fall? (Do not round intermediate
calculations and round your answer to 4 decimal places, e.g.,
32.1616.)
Share price decline
D
d. Suppose the only owners of stock are
corporations. Recall that corporations get at least a 70 percent
exemption from taxation on the dividend income they receive, but
they do not get such an exemption on capital gains. If the
corporation's income and capital gains tax rates are both 40
percent, what does this model predict the change in the ex-dividend
share price will be? (Do not round intermediate
calculations and round your answer to 4 decimal places, e.g.,
32.1616.)
Share price decline
D