As discussed in the text, in the absence of market imperfectionsand tax effects, we would expect the share price to decline by theamount of the dividend payment when the stock goes ex dividend.Once we consider the role of taxes, however, this is notnecessarily true. One model has been proposed that incorporates taxeffects into determining the ex-dividend price:
  
(P₀ – P_X) / D = (1– T_P) / (1 – T_G)

Here P₀ is the price just before the stock goesex, P_X is the ex-dividend share price,D is the amount of the dividend per share,T_P is the relevant marginal personal tax rateon dividends, and T_G is the effective marginaltax rate on capital gains.

a. If T_P =T_G = 0, how much will the share price fall whenthe stock goes ex? (Do not round intermediate calculationsand round your answer to the nearest whole number, e.g.,32.)

Share price decline            D

b. If T_P = 10 percentand T_G = 0, how much will the share price fall?(Do not round intermediate calculations and round youranswer to 2 decimal places, e.g., 32.16.)

Share price decline             D

c. If T_P = 10 percent and ifT_G = 15 percent, how much will the share pricefall? (Do not round intermediatecalculations and round your answer to 4 decimal places, e.g.,32.1616.)

Share price decline            D

d. Suppose the only owners of stock arecorporations. Recall that corporations get at least a 70 percentexemption from taxation on the dividend income they receive, butthey do not get such an exemption on capital gains. If thecorporation's income and capital gains tax rates are both 30percent, what does this model predict the change in the ex-dividendshare price will be? (Do not round intermediatecalculations and round your answer to 4 decimal places, e.g.,32.1616.)

Share price decline             D

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