Please use the information provided below to answer problems 1 - 4: A year ago you purchased the ABC stock for 60. The stock is now selling for 80. The firm has just announced that it will distribute a special dividend of 10. You are considering whether or not you should sell the stock now before it goes ex-dividend (trading strategy I), or alternatively, wait to capture the dividend and then sell the stock immediately afterwards (trading strategy II). These two strategies were reviewed during our last class meeting.
Problem 1 If your capital gains tax rate equals your dividend tax rate, what ex-dividend price per share makes you indifferent between the two trading strategies? State you answer rounded off to two decimal points.
Problem 2 Assume now that ABC’s corporate tax rate is 28%, while your capital gains and dividend tax rates equal 10% and 20%, respectively. What ex-dividend price per share will now make you indifferent between the two trading strategies? State you answer rounded off to two decimal points.
Problem 3 For the ex-dividend price per share calculated in problem 2, what is the resulting net cash flow from pursuing trading strategy II? State you answer rounded off to two decimal points.
Problem 4 Given the information provided above, what is the resulting net cash flow from pursuing trading strategy I? State you answer rounded off to two decimal points.
Please use information provided below to answer problems 5 - 7: Having completing its capital spending for the year, Newcaste Ayl has 1,000 extra cash. Two cash distribution strategies are available: (1) Retain the cash for the purpose of investing in Treasury bonds yielding 8% with the annual returns subsequently distributed to investors as a dividend, or (2) Paying the cash out to investors who would invest in the bonds themselves.
Problem 5 Assume that Newcastle Ayl’s tax rate is 23% (0.23). What investor tax rate on dividend payments and interest income would make investors indifferent between the two cash distribution strategies? State your answer as a decimal number rounded off to two points (for example, 0.37).
Problem 6 Assume that Newcaste Ayl’s tax rate is 23% (0.23). If the investor tax rate on dividend payments and interest income is 20%, what is investors’ after-tax cash flow if Newcastle Ayl applies cash distribution strategy 2? State your answer rounded off to two decimal points.
Problem 7 Assume that Newcastle Ayl’s tax rate is 23%. If the investor tax rate on dividend payments and interest income is 20%, what is investors’ after-tax cash flow if Newcastle Ayl applies cash distribution strategy 1? State you answer rounded off to two decimal points.