On 1/1/X7 Vladimir bought 1000 shares of stock C and 1000 shares of stock D. The price of each stock on that date was $200. From 1/1/X7 until 12/31/X7 both stocks appreciated in value by 20%. Firm C then repurchased 10% of its stock at the end of the day on 12/31/X7, at the prevailing market price of the share but paid no dividends. In contrast firm D did not repurchase but paid dividends of 10% at the end of the day on 12/31/X7 and the stock price fell the full amount of the dividend. Both stocks appreciated in value by 10% in the following year. Both firms paid a dividend of 10% on 12/31/X8 and the stock price fell by 10%. Vladimir’s tax rate on capital gains is 15% and his tax rate on dividends is 25%.

(a) How much stock would Vladimir have needed to sell in firm C on 12/31/X7 to have the same after tax amount as from his dividends from stock D at that date?

(b) If he had followed the strategy in part (a) what would have been the total remaining after tax receipts (i.e. including dividends and proceeds from selling shares) from his positions if he sold all his remaining shares in C and D on 12/31/X8 after the 10% dividend had been paid and after the price had fallen 10%

(c) If the middle-of-the-roaders’ theory holds did firm C or firm D have an optimal dividend policy in terms of maximizing firm value?

(d) How could Vladimir have improved his after tax payoff on both stocks by changing the timing of his final sales of stock in C and D from 12/31/X8?