Question;Lecture Five - Payout Policy;17-1. What options does a firm have to spend its free cash;flow (after it has satisfied all interest obligations)?;17-2. ABC;Corporation announced that it will pay a dividend to all shareholders of record;as of Monday, April 3, 2006. It takes three business days of a purchase for the;new owners of a share of stock to be registered.;a. When is the last day an investor can;purchase ABC stock and still get the dividend payment?;b. When is the ex-dividend day?;17-3. Describe;the different mechanisms available to a firm to use to repurchase shares;17-4. RFC;Corp. has announced a $1 dividend. If RFC?s price last price cum-dividend is;$50, what should its first ex-dividend price be (assuming perfect capital;markets)?;17-5. EJH;Company has a market capitalization of $1 billion and 20 million shares;outstanding. It plans to distribute $100 million through an open market;repurchase. Assuming perfect capital markets;a. What will the price per share of EJH be;right before the repurchase?;b. How many shares will be repurchased?;c. What will the price per share of EJH be;right after the repurchase?;17-7. Natsam;Corporation has $250 million of excess cash. The firm has no debt and 500;million shares outstanding with a current market price of $15 per share.;Natsam?s board has decided to pay out this cash as a one-time dividend.;a. What is the ex-dividend price of a share in;a perfect capital market?;b. If the board instead decided to use the;cash to do a one-time share repurchase, in a perfect capital market what is the;price of the shares once the repurchase is complete?;c. In a perfect capital market, which policy;in part (a) or (b), makes investors in the firm better off?;17-8. Suppose;the board of Natsam Corporation decided to do the share repurchase in Problem;7(b), but you, as an investor, would have preferred to receive a dividend;payment. How can you leave yourself in the same position as if the board had;elected to make the dividend payment instead?;17-9. Suppose;you work for Oracle Corporation, and part of your compensation takes the form;of stock options. The value of the stock option is equal to the difference;between Oracle?s stock price and an exercise price of $10 per share at the time;that you exercise the option. As an option holder, would you prefer that Oracle;use dividends or share repurchases to pay out cash to shareholders? Explain.;17-10. The HNH;Corporation will pay a constant dividend of $2 per share, per year, in;perpetuity. Assume all investors pay a 20% tax on dividends and that there is;no capital gains tax. Suppose that other investments with equivalent risk to;HNH stock offer an after-tax return of 12%.;a. What is the price of a share of HNH stock?;b. Assume that management makes a surprise;announcement that HNH will no longer pay dividends but will use the cash to;repurchase stock instead. What is the price of a share of HNH stock now?;17-11. Using;Table 17.2, for each of the following years, state whether dividends were tax;disadvantaged or not for individual investors with a one-year investment;horizon;a. 1985;b. 1989;c. 1995;d. 1999;e. 2005;17-12. 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.);58.33% in 1981 and 37.5%;in 1982;17-13. 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?;17-14. 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?;17-15. 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?.;17-16. 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?;17-17. 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?;17-18. 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?
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