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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:$1$

$($P$0$ PX$)/$D $=(1$ TP$)/(1$ TG$)$

where P$0$ is the price just before the stock goes ex$,$ PX is the ex$-$dividend share price, D is 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$?$

multiple choice

P$0$

D Correct

PX

b$.$

If TP $=17$ 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$.,32\mathrm{.}16.)$

c$.$

If TP $=17$ 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$.,32\mathrm{.}1616.)$

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$$s income and capital gains tax rates are both $28$ percent, what does this model predict the ex$-$dividend share price will be$?($Do not round intermediate calculations and round your answer to $4$ decimal places, e$.$g$.,32\mathrm{.}1616.)$Gecko Company and the Gordon Company are two firms that have the same business risk but different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of $9$ percent. Suppose the capital gains tax rate is zero, whereas the income tax rate is $30$ percent. Gecko has an expected earnings growth rate of $17$ percent annually, and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal $($because they are in the same risk class$).$ What is the pretax required return on Gordon$$s stock?

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