A. Plato Corporation's board announces to pay $2 million excess cash to shareholders. At the announcement, the firm has no debt and 1 million shares outstanding with the market value of equity of $12 million. Assume that the markets are perfect. i) What is the cum-dividend price? ii) If the firm distributes the excess cash as a cash dividend, what is the ex-dividend price? Is the drop in share price the same as the cash dividend per share? Why? iii) If the firm distributes the excess cash as a share repurchase, what will its share price once the shares are repurchased? iv) If you hold 1,000 shares and the firm distributes the excess cash as a share repurchase in part ii, how do you use homemade dividend to receive a cash dividend as in part (ii)?
B. MC Corporation has assets with a market value of $1000 million, $50 million of
The board of directors of the firm has just announced that it will use the excess cash to pay a cash dividend. Suppose that the capital gain tax rate is 20% and the dividend tax rate is 25%. Assume that there are no other market imperfections except taxes. (i) What is the effective dividend tax rate? What is the minimum ex-dividend stock price for an investor who could gain from trading to capture the dividend? (ii) An investor purchased 2000 shares of the firm several days before the dividend announcement date at the price of $30 per share. If the investor firmly predicts that the ex-dividend price is $32 per share and takes some transactions to benefit from the investor's prediction, what is the net profit that is, the net income after all taxes of this investor?
