of the dividend payment wi ne snare price to ecline by lividend. Once we consider the role of taxes, however, this is not ne as been proposed that incorporates tax effects into determining the PO Px)/D = (1 - Tp)/(1-TG) where Po is the price just before the stock goes ex, Px is the ex-divid mount of the dividend per share, Tp is the relevant marginal person G is the effective marginal tax rate on capital gains.
of the dividend payment wi ne snare price to ecline by lividend. Once we consider the role of taxes, however, this is not ne as been proposed that incorporates tax effects into determining the PO Px)/D = (1 - Tp)/(1-TG) where Po is the price just before the stock goes ex, Px is the ex-divid mount of the dividend per share, Tp is the relevant marginal person G is the effective marginal tax rate on capital gains.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text: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:
(Po Px)/D = (1
Tp)/(1-TG)
where PO 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.
Transcribed Image Text: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, how much will the share price fall?
Note: Do not round intermediate calculations and round your answer to 4 decimal
places, e.g., 32.1616.
Decrease in share price
D
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