Problem $19-18$ Dividends and Taxes

As discussed in the text, in the absence of market imperfections and tax effects, we would expect the share price to decline by the amount of the dividend payment when the stock goes ex dividend. Once we consider the role $"$ of taxes, however, this is not necessarily true. One model has been proposed that incorporates tax effects into determining the ex$-$dividend price:

$\frac{P_O-P_x}{D}=\frac{1-T_P}{1-T_G}$

Here $P_O$ is the price just before the stock goes ex$,P_x$ is the ex$-$dividend share price, $D$ is the amount of the dividend per share, $T_{}$ is the relevant marginal personal tax rate on dividends, and $T_G$ is the effective marginal tax rate on capital gains.

a$.$ If $T_P=T_G=0,$ how much will the share price fall when the stock goes ex$?$

Po

$P_x$

D

b$.$ If $T_P=10$ percent and $T_G=0,$ how much will the share price fall? $($Do not round intermediate calculations and round your answer to $2$ decimal places, e$.$g$.,32\mathrm{.}16.)$

Decrease in share price $D$

c$.$ If $T_P=11$ percent and $T_G=23$ percent, how much will the share price fall? $($Do not round intermediate calculations and round your answer to $4$ decimal places, e$.$g$.,32\mathrm{.}1616.)$

Decrease in share price $$

d$.$ Suppose the prily owners af stock are carparations. Recall that corporations get at least a $50$ percent exemptian fram taxatian an the dividend income phey receive. buts. they do not get such an exemptian an capilal gains if the corporation's income and. capital gains tak rates are bath $21$ percent, how muph will the sthme price fall? $($Dos not round intermediate calculatigns and raund your answer to & decimat places, &$\mathrm{.}9.32\mathrm{.}1616).$

Decrease in shane pripe