EBK CORPORATE FINANCE
EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 17, Problem 19P
Summary Introduction

To determine: The highest dividend tax rate.

Introduction:

Effective tax rates mainly depend on the investors’ tax rates, which they are facing on the dividends and capital gains. There are various types of investors like individual investors, pension funds, mutual funds, and corporation who have different tax rates with advantages and disadvantages.

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Wyatt Oil pays a regular dividend of $2.0 per share. Typically, the stock price drops by $2.20 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 24%, but investors pay different tax rates on dividends. Absent transactions cost, the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to (%) (2 decimal places):
Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if a. 100 percent debt is used? b. 100 percent common stock? (assume that the stockholders will accept 0.08)
a) Ex-Dividend Price Company A has declared a dividend of $2.60 per share. Suppose capital gains are not taxed but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. The stock closed at $36.80 per share today and the stock goes ex dividend tomorrow. What will be the ex-dividend price? b) Market value and homemade dividends An investor own 100 shares of Firm X. The company will pay 0.50 per share this year and final liquating dividend of $42 per share next year. The required return of this stock is 14%. Ignoring taxes, what is the current market value of one share of this stock? What will the investor's homemade dividend per share be next year if they do not want any dividend this year? (hint: buy shares with the dividends this year)

Chapter 17 Solutions

EBK CORPORATE FINANCE

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Dividend explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=Wy7R-Gqfb6c;License: Standard Youtube License