Miller, Inc., has declared a $6.30 per share dividend. Suppose capital gains are
ID: 2777622 • Letter: M
Question
Miller, Inc., has declared a $6.30 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 10 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Miller sells for $114 per share, and the stock is about to go ex-dividend.
What do you think the ex-dividend price will be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Required:What do you think the ex-dividend price will be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
For an investor, there is no difference whether the returns come from dividends or from capital appreciation.
Thus, After tax capital gains = After tax gain on dividends
(1 - capital gains tax) * change in stock price = (1 - dividend tax) * dividend
capital gains tax = 0% and dividend witholding tax = 10%
Thus,
change in stock price = (1 - 10%) * 6.30
change in stock price = 0.90 * 6.30 = 5.67
Thus, ex-dividend price = 114 - 5.67 = $108.33