An all-equity firm with 40M shares outstanding has the payout policy of distributing 50% of its net income as dividends to its shareholders every year. The firm’s net income this year is $100M. An investor who purchased one share of the firm’s stock a year ago at $45 pans is looking to sell. Suppose the investor’s personal tax rate on both dividend and capital gains income is 15%.
(A) What after-tax return should this investor expect to earn if she were to sell her share at the current price of $54 prior to the ex-dividend date?
(B) What after-tax return should this investor expect to earn if she were to sell her share on the exdividend date?