Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 17, Problem 1QP
Summary Introduction
To calculate: Ex-
Introduction:
Ex-dividend price: The date between the announcement date and payment date is ex-dividend date. A stock, which trades on ex-dividend date, termed as stock on ex-dividend. A stock becomes ex-dividend, when the person gets the payment of dividend.
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QUESTION 8
For example, suppose a dividend of $1 per share is taxed at ordinary rates. Investors
in the 28 percent tax bracket who own 100 shares of the security pay $100 x 28 = $28
in taxes. Selling shareholders would pay far lower taxes if $100 worth of stock were
repurchased. This is because taxes are paid only on the profit from a sale. The gain on
a sale would be only $40 if shares sold at $100 were originally purchased at $60.
The capital gains tax would be ?
01.$11.20
O2. $38.20
O 3. $28.00
O 4. None of these
c. If Tp = 15 percent and TG = 30 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
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 21 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.)
Share price
D
N. Elton and M. Gruber, "Marginal Stockholder Tax Rates and the Clientele Effect,"
Review of Economics and Statistics 52 (February 1970).
the balance sheet look like after the dividends are paid?
Q.4 Rudolph Corporation is evaluating an extra dividend versus a share repurchase. In either case,
$11,000 would be spent. Current earnings are $1.40 per share, and the stock currently sells for $58
per share. There are 2,000 shares outstanding. Ignore taxes and other imperfections in answering the
first two questions.
(a) Evaluate the two alternatives in terms of the effect on the price per share of the stock and
shareholder wealth.
(b) What will be the effect on Rudolph's EPS and P/E ratio under the two different scenarios?
(c) In the real world, provided tax deductions are made, which of these actions would you
recommend? Why?
O Search
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Chapter 17 Solutions
Fundamentals of Corporate Finance
Ch. 17.1 - Prob. 17.1ACQCh. 17.1 - What are the mechanics of the cash dividend...Ch. 17.1 - How should the price of a stock change when it...Ch. 17.2 - How can an investor create a homemade dividend?Ch. 17.2 - Prob. 17.2BCQCh. 17.3 - Prob. 17.3ACQCh. 17.3 - Why do flotation costs favor a low payout?Ch. 17.4 - Why might some individual investors favor a high...Ch. 17.4 - Prob. 17.4BCQCh. 17.5 - How does the market react to unexpected dividend...
Ch. 17.5 - Prob. 17.5BCQCh. 17.6 - Prob. 17.6ACQCh. 17.6 - Prob. 17.6BCQCh. 17.8 - Prob. 17.8ACQCh. 17.8 - How does the accounting treatment of a stock split...Ch. 17 - Dividends are paid to the parties listed as...Ch. 17 - Prob. 17.3CTFCh. 17 - Prob. 17.4CTFCh. 17 - Prob. 17.8CTFCh. 17 - Dividend Policy Irrelevance [LO2] How is it...Ch. 17 - Prob. 2CRCTCh. 17 - Prob. 3CRCTCh. 17 - Prob. 4CRCTCh. 17 - Prob. 5CRCTCh. 17 - Prob. 6CRCTCh. 17 - Prob. 7CRCTCh. 17 - Prob. 8CRCTCh. 17 - Prob. 9CRCTCh. 17 - Prob. 10CRCTCh. 17 - Prob. 1QPCh. 17 - Prob. 2QPCh. 17 - Prob. 3QPCh. 17 - Prob. 4QPCh. 17 - Regular Dividends [LO1] The balance sheet for...Ch. 17 - Prob. 6QPCh. 17 - Prob. 7QPCh. 17 - Stock Dividends [LO3] The company with the common...Ch. 17 - Stock Splits [LO3] In the previous problem,...Ch. 17 - Homemade Dividends [LO2] You own 1,000 shares of...Ch. 17 - Prob. 11QPCh. 17 - Stock Repurchase [LO4] Galles Corporation is...Ch. 17 - Expected Return, Dividends, and Taxes [LO2] The...Ch. 17 - Dividends and Taxes [LO2] As discussed in the...Ch. 17 - Prob. 15QPCh. 17 - Dividends versus Reinvestment [LO2] After...Ch. 17 - Prob. 1MCh. 17 - Prob. 2MCh. 17 - Prob. 3MCh. 17 - Prob. 4MCh. 17 - Prob. 5MCh. 17 - Prob. 6M
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- Estes Park, Inc., has declared a dividend of $5.90 per share. Suppose capital gains are not taxed, but dividends are taxed at 20 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The company's stock sells for $110 per share, and the stock is about to go ex-dividend. What do you think the ex-dividend price will be?arrow_forwardThe current stock price of a company is $100 a share. This company announces a dividend of $5 a share. On ex-dividend day the stock price drops $4 to $96 a share. If the tax rate on dividends, D, is 30%, what is the implied tax rate on capital gains, G? You are a tax-exempt institution, and you plan to sell 100 shares (that you already own) of this stock; would you sell them cum- or ex-dividend?arrow_forwarda) Ex-Dividend Price Company A has declared a dividend of $2.60 per share. Suppose capital gains are not taxed but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The stock closed at $36.80 per share today and the stock goes ex dividend tomorrow. What will be the ex-dividend price? b) Market value and homemade dividends An investor own 100 shares of Firm X. The company will pay 0.50 per share this year and final liquating dividend of $42 per share next year. The required return of this stock is 14%. Ignoring taxes, what is the current market value of one share of this stock? What will the investor's homemade dividend per share be next year if they do not want any dividend this year? (hint: buy shares with the dividends this year)arrow_forward
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