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:1 |
(P0 – PX)/D = (1 – TP)/(1 – TG) |
where P0 is the price just before the stock goes ex, PX is the ex-dividend share price, Dis 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? |
|
b. |
If TP = 11 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.) |
c. |
If TP = 11 percent and TG = 25 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.) |
d. |
Suppose the only owners of stock are corporations. Recall that corporations get at least a 50 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 22 percent, what does this model predict the ex-dividend share price will be? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) |
a). (P0 - PX) / D = (1 - tP) / (1 - tG)
(P0 - PX) = D * [(1 - tP) / (1 - tG)]
(P0 - PX) = D * [(1 - 0) / (1 - 0)]
(P0 - PX) = D * 1
(P0 - PX) = D
b). (P0 - PX) = D * [(1 - tP) / (1 - tG)]
(P0 - PX) = D * [(1 - 0.11) / (1 - 0)]
(P0 - PX) = D * 0.89
c). (P0 - PX) = D * [(1 - tP) / (1 - tG)]
(P0 - PX) = D * [(1 - 0.11) / (1 - 0.25)]
(P0 - PX) = D * [0.89 / 0.75]
(P0 - PX) = D * 1.1867
d). (P0 - PX) = D * [(1 - tP) / (1 - tG)]
(P0 - PX) = D * [{1 - (0.22 * 0.50)} / (1 - 0.22)]
(P0 - PX) = D * [0.89 / 0.78]
(P0 - PX) = D * 1.1410
As discussed in the text, in the absence of market imperfections and tax effects, we would...
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...
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:1 (P0 – PX) / D = (1 – TP) / (1 – TG) where P0 is...
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...
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...
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: (Po-PxID (1Tp/(1 TG where Po is the price just before the stock goes ex, Px is the ex-dividend...
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: (Po-PX)/D= (1 - Tp)/(1 – TG) where Po is the price just before the stock goes ex, Px...
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...
Chapter 14 - Dividends and Dividend Policy Saved AS aiscussea in tne text, in tne apsence or market imperrections ana tax erects, 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: 2 (Po-PxID= (1- TA/(1-Td Skipped where Po is the price...
The balance sheet for Sinking Ship Corp. is shown here in market value terms. There are 5,000 shares of stock outstanding. Market Value Balance Sheet $ 44,800 Equity 420,000 Cash Fixed assets $464,800 Total $464,800 Total 464,800 The company has declared a dividend of $1.70 per share. The stock goes ex dividend tomorrow Ignoring any tax effects, what is the stock selling for today? (Do not round Intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Stock...
Suppose that a country has a tax rate on dividends (TP) of 40%. It has a tax rate on capital gains (TG) of 20%. If these taxes affect the stock price on the ex-dividend date, what should happen to the stock price on the ex-dividend date if a corporation pays a dividend per share of $5 a) A $10 decrease in the stock price. b) A $3.75 decrease in the stock price. c) A $3 decrease in the stock price....