General Manufacturing Company (GMC) follows a policy of paying out 50% of its net income as cash

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 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 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 amount on the ex-dividend date.
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...