Suppose that all capital gains are taxed at a 30 % rate, and that the dividend tax rate is 42 % . Arbuckle Corp. is currently trading for $39 , and is about to pay a $6 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? 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 $nothing . (Round to the nearest cent.)
Part a
Effective dividend tax rate = (dividend tax rate - capital gains tax rate) /(1 - capital gains tax rate)
= (0.42 – 0.30) / (1 – 0.30)
= 0.1714
= 17.14%
Share price after dividend is paid = current price - dividend paid (1 - dividend tax rate)
= $39 – $6 * (1 – 0.1714)
= $34
Part b
Dividend tax = dividend paid x dividend tax rate
= $6 * 0.42
= $2.52
Tax savings = dividend paid (1 - dividend tax rate) x capital gains tax rate
= $6 (1 - 0.42)* 0.30
= $1.04
Net tax savings = Dividend tax - tax savings
= $2.52 - $1.04
= $1.48
Part C
New stock price= current trading price + net tax savings
= $30 + $1.48
= $31.48
New stock price is increased
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