2. In the absence of market imperfections and tax effects, we would expect the share price...

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2. In the absence of market imperfections and tax effects, wewould expect the share price to decline by the amount of thedividend payment when the stock goes ex dividend. Once we considerthe role of taxes, however, this is not necessarily true. One modelhas been proposed that incorporates tax effects into determiningthe ex-dividend price: (Po – Px)/D = (1 – Tp)/(1 – Tg) Here, Po isthe price just before the stock goes ex, Px is the ex-dividendshare price, D is the amount of the dividend per share, Tp is therelevant marginal personal tax rate on dividends and Tg is theeffective marginal tax rate on capital gains.
a. If Tp = Tg = 0 how much will the share price fall when thestock price goes ex?
b. If Tp = 15% and Tg = 0 how much will the share pricefall?
c If Tp = 15% and Tg = 20% how much will the share pricefall?
d. Suppose the only owners of stock are corporations. Recallthat corporations get at least a 70% exemption from taxation on thedividend income they receive, but why do not get such an exemptionon capital gains. If the corporation’s income and capital gains taxrates are both 35%, what does this model predict the ex-dividendshare price will be?

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2. In the absence of market imperfections and tax effects, wewould expect the share price to decline by the amount of thedividend payment when the stock goes ex dividend. Once we considerthe role of taxes, however, this is not necessarily true. One modelhas been proposed that incorporates tax effects into determiningthe ex-dividend price: (Po – Px)/D = (1 – Tp)/(1 – Tg) Here, Po isthe price just before the stock goes ex, Px is the ex-dividendshare price, D is the amount of the dividend per share, Tp is therelevant marginal personal tax rate on dividends and Tg is theeffective marginal tax rate on capital gains.a. If Tp = Tg = 0 how much will the share price fall when thestock price goes ex?b. If Tp = 15% and Tg = 0 how much will the share pricefall?c If Tp = 15% and Tg = 20% how much will the share pricefall?d. Suppose the only owners of stock are corporations. Recallthat corporations get at least a 70% exemption from taxation on thedividend income they receive, but why do not get such an exemptionon capital gains. If the corporation’s income and capital gains taxrates are both 35%, what does this model predict the ex-dividendshare price will be?