As discussed in the text, in the absence of market imperfections and tax effects
ID: 2647191 • Letter: A
Question
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
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
Explanation / Answer
b)
TP = 28 , TG =0
=>
share price fall =
Po-Px = D * (1-0.28) = 0.72 * D
c)
TP = 15 , TG = 30%
share price fall = D * (1-0.15)/(1-0.3) = 1.21 * D
d)
share price = (1-0.39) * D * (1-0.7) = 0.183D
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