Question

Jasper Metals, Inc. just announced that it will pay its regular quarterly dividend of $3.50 per share.
a. Does the stock price fall to reflect this payment on the announcement date, the record date, the ex-dividend date, or the payment date?
b. Assume that there are no market imperfections. By how much will the stock price fall?
c. Suppose investors must pay a 38% tax on dividends received but pay nothing on capital gains. How would this change your answer to part (b)?
d. Now suppose that investors must pay 38% in taxes on both dividends and capital gains. In this case, how much would you expect the stock price to fall in response to the dividend?
e. Suppose that, just prior to the dividend announcement, Jasper Metals stock was worth $175 per share. Assume once again that there are no taxes. If you own 50 shares, then what is the value of your investment? How does the dividend payment affect your wealth? If Jasper Metals cancels the dividend and announces that they will repurchase 2% of their outstanding shares, what effect does that have on your wealth?


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  • CreatedMarch 26, 2015
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