Twilight Company s stock is selling for 60 25 per share and
Twilight Company’s stock is selling for $60.25 per share, and the firm’s managers have just announced a $1.50 per share dividend payment.
a. What should happen to Twilight Company’s stock price on the ex-dividend date, assuming that investors do not have to pay taxes on dividends or capital gains and do not incur any transactions costs in trading shares?
b. What should happen to Twilight Company’s stock price on the ex-dividend date, assuming that it follows the historical performance of U.S. stock prices on ex-dividend days?
c. If the historical “ex-dividend day price effect” observed in U.S. stock markets was indeed a tax effect, what should happen to Twilight Company’s stock price on the ex-dividend date, given the tax changes embodied in the Jobs and Growth Tax Relief Reconciliation Act of 2003?
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