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 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.