Question: You are a research analyst interested in how dividends affect stock prices. Assume that there is only one income tax rate (i ) and a

You are a research analyst interested in how dividends affect stock prices. Assume that there is only one income tax rate (i ) and a capital gains rate (c ). Also assume that the owner has held the stock for more than one year already.

(a) Denoting the price of the stock before and after the ex-dividend date as pb and p, what should be the theoretical drop in the stock price ex-dividend?

(b) Suppose that you further study the data since 1984 and find that the typical stock drops by 90% of the dividend on ex-dividend date. Could you profit from this information if you managed a tax-exempt pension fund? How?

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