Suppose that all capital gains are taxed at a

21%

rate, and that the dividend tax rate is

47%.

Arbuckle Corp. is currently trading for

$34,

and is about to pay a

$4

special dividend.

a. Absent any other trading frictions or news, what will its share price be just after the dividend is paid?

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend.

b. What net tax savings per share for an investor would result from this decision?

c. What would happen to Arbuckle's stock price upon the announcement of this change?

Question content area bottom

Part 1

a. Absent any other trading frictions or news, what will its share price be just after the dividend is paid?

Absent any other trading frictions or news, the share price just after the dividend is paid is

$31.3231.32.

(Round to the nearest cent.)

Part.2

Suppose Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend.

b. What net tax savings per share for an investor would result from this decision?

If Arbuckle made a surprise announcement that it would do a share repurchase rather than pay a special dividend, the net tax savings per share is

$0.0250.025.

(Round to the nearest cent.)

What would happen to Arbuckle's stock price upon the announcement of this change?

Answer rating: 100% (QA)

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