1. Assume that an investor purchased GMC stock a year ago at $45. The investor, who faces a personal tax rate of 15% on both dividend income and on capital gains, plans to sell the stock soon. Transactions costs are negligible.
a. Calculate the after-tax return this investor will earn if she sells GMC stock at the current $54 stock price prior to the ex-dividend date.
b. Calculate the after-tax return the investor will earn if she sells GMC stock on the ex-dividend dtae, assuming that the stock's price falls by the dividend amount on the ex-dividend date.
2. General Manufacturing Company (GMC) follows a policy of paying out 50% of its net income as dividends to its shareholders each year. The company plans to do so again this year, during which GMC earned $100 million in net profits after tax. The company has 40 million shares outstanding.
a. What is the company’s dividend payment per share this year?
b. Assuming that GMC’s stock price is $54 per share immediately before its ex-dividend date, what is the expected price of GMC stock on the ex-dividend date if there are no personal taxes on dividend income received?