Question

As discussed in the text in the absence of market imperfections and tax effects, we would expect the share price to decine by the amount of the dividend payment when the stock oes 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 (Po - PW) /D- (1 - Tp) / (1 - TO) Here Po is the price just before the stock goes ex. Py is the ex-dividend share price effective marginal tax rate on capital gains is the amount of the dividend per share. Tp is the relevant marginal personal tax rate on dividends, and To is the a. If Tp To how much will the share price foil when the Mock goes ek? (Do not round intermediate calculations and round your answer to the nearest whole number, ... 32.) Share price decline 0.85 D b. If - 15 percent and to how much will the share price ? (Do not round intermediate calculations and round your answer to 2 decimal places, ... 32.16) Share price decline 005 D c. If Tp 15 percent and it To 15 percent how much will the share price fall? (Do not round intermediate calculations and round your answer to decimal places, ... 12.1016.) Share price decine d. Suppose the only owners of stock are corporations Recall that corporations et at least a 70 percent exemption from taxation on the dividend income they receive, but they do not get such an on on capital gains if the corporations 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 found intermediate calculations and round your answer to decimal places. .. 32.1616.) Share price Decline

Answer 1

4 Formula Given is (PO - Px)/D = (1-Tp)/(1-Tg) 6 a) 7 if Tp = Tg = 0 then the above formula becomes (PO - Px)/D = 1 PO - Px =D PO - Px is the fall in share price when the stock goes ex Share price decline is 1D Since corporattions are the only owners, then Tp becomes 30% of 40%, since they'll only pay taxes on 30% pf the dividend (PO - Px)/D = (1-0.12)/(1-0.4) (PO - Px)/D = 1.47 PO - Px is the fall in share price when the stock goes ex Share price decline is 1.47D 13 b if Tp = 15%, Tg = 0 then the above formula becomes (PO - Px)/D = (1-15%)/1 (PO - Px) = 0.85*D PO - Px is the fall in share price when the stock goes ex Share price decline is 0.85D 20 c) if Tp = 15%, Tg = 15% then the above formula becomes (PO - Px)/D = (1-15%)/(1-15%) (PO - Px) =D PO - Px is the fall in share price when the stock goes ex Share price decline is 1D