1.What was the effective dividend tax rate for a U.S. investor in the highest tax bracket who planned to hold a stock for one year in 1981? How did the effective dividend tax rate change in 1982 when the Reagan tax cuts took effect? (Ignore state taxes.)

2.The dividend tax cut passed in 2003 lowered the effective dividend tax rate for a U.S. investor in the highest tax bracket to a historic low. During which other periods in the last 35 years was the effective dividend tax rate as low?

3.Suppose that all capital gains are taxed at a 25% rate, and that the dividend tax rate is 50%. Arbuckle Corp. is currently trading for $30, 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?

4.You purchased CSH stock for $40 one year ago and it is now selling for $50. The company has announced that it plans a $10 special dividend. You are considering whether to sell the stock now, or wait to receive the dividend and then sell.

a. Assuming 2008 tax rates, what ex-dividend price of CSH will make you indifferent between selling now and waiting?

b. Suppose the capital gains tax rate is 20% and the dividend tax rate is 40%, what ex-dividend price would make you indifferent now?

5.On Monday, November 15, 2004, TheStreet.com reported: “An experiment in the efficiency of financial markets will play out Monday following the expiration of a $3.08 dividend privilege for holders of Microsoft.” The story went on: “The stock is currently trading ex-dividend both the special $3 payout and Microsoft’s regular $0.08 quarterly dividend, meaning a buyer doesn’t receive the money if he acquires the shares now.” Microsoft stock ultimately opened for trade at $27.34 on the ex-dividend date (November 15), down $2.63 from its previous close.

a. Assuming that this price drop resulted only from the dividend payment (no other information affected the stock price that day), what does this decline in price imply about the effective dividend tax rate for Microsoft?

b. Based on this information, which of the following investors are most likely to be the marginal investors (the ones who determine the price) in Microsoft stock:

i. Long-term individual investors?

ii. One-year individual investors?

iii. Pension funds?

iv. Corporations?

6.At current tax rates, which of the following investors are most likely to hold a stock that has a high dividend yield:

a. Individual investors?

b. Pension funds?

c. Mutual funds?

d. Corporations?

7.Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from trading to capture the dividend?

8.A stock that you know is held by long-term individual investors paid a large one-time dividend. You notice that the price drop on the ex-dividend date is about the size of the dividend payment.

You find this relationship puzzling given the tax disadvantage of dividends. Explain how the dividend-capture theory might account for this behavior.

9.Clovix Corporation has $50 million in cash, 10 million shares outstanding, and a current share price of $30. Clovix is deciding whether to use the $50 million to pay an immediate special dividend of $5 per share, or to retain and invest it at the risk-free rate of 10% and use the $5 million in interest earned to increase its regular annual dividend of $0.50 per share. Assume perfect capital markets.

a. Suppose Clovix pays the special dividend. How can a shareholder who would prefer an increase in the regular dividend create it on her own?

b. Suppose Clovix increases its regular dividend. How can a shareholder who would prefer the special dividend create it on her own?

10.Assume capital markets are perfect. Kay Industries currently has $100 million invested in short term Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment.

a. If the board went ahead with this plan, what would happen to the value of Kay stock upon the announcement of a change in policy?

b. What would happen to the value of Kay stock on the ex-dividend date of the one-time dividend?

c. Given these price reactions, will this decision benefit investors?

11.Redo Problem 10, but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes.