Question

General Manufacturing Company (GMC) follows a policy of paying out 50% of its net income as cash dividends to its shareholders each year. The company plans to do so again this year, during which GMC earned $100 million in net profits after tax. The company has 40 million shares outstanding and pays dividends annually. Assume that an investor purchased GMC stock a year ago at $45. The investor, who faces a personal tax rate of 15% on both dividend income and on capital gains, plans to sell the stock soon. Transactions costs are negligible.
a. Calculate the after-tax return this investor will earn if she sells GMC stock at the current $54 stock price prior to the ex-dividend date.
b. Calculate the after-tax return the investor will earn if she sells GMC stock on the ex-dividend date, assuming that the price of GMC stock falls by the dividend amount on the ex-dividend date.
c. Calculate the after-tax return the investor will earn if she sells GMC stock on the ex-dividend date, assuming that the price of GMC stock falls by one-half the dividend amount on the ex-dividend date.


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  • CreatedMarch 26, 2015
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