18.There are several ways to approach this problem, but all (when done correctly!) should give approximately the same answer. We have chosen to use the regression analysis function of an electronic spreadsheet program to calculate the alpha and beta for each security. The regressions are in the following form:
Security return = alpha + (beta ( market return) + error term
The results are:
| |Alpha |Beta | |Executive Cheese |-1.44 |0.21 | |Paddington Beer |1.33 |0.19 |
The abnormal return for Executive Cheese in February 2007 was:
–7.1 – [–1.44 + 0.21 ( (–0.5)] = –5.555%
For Paddington Beer, the abnormal return was:
–14.1 – [1.33 + 0.19 ( (–0.5)] = –15.335%
Thus, the average abnormal return of the two stocks during the month of the dividend announcement was –10.445%.
|Gross profits |$ |760,000 | |Interest | |100,000 | |EBT |$ |660,000 | |Tax (at 35%) | |231,000 | |Funds available to common shareholders |$ |429,000 |
|Gross profits (EBT) |$ |760,000 | |Tax (at 35%) | |266,000 | |Net income |$ |494,000 | |Preferred dividend | |80,000 | |Funds available to common shareholders |$ |414,000 |
16.a.€5 ( (10,000,000/4) = €12.5 million
A stockholder who previously owned four shares had stocks with a value of: (4 ( €6) = €24. This stockholder has now paid €5 for a fifth share so that the total value is: (€24 + €5) = €29. This stockholder now owns five shares with a value of: (5 ( €5.80) = €29, so that she is no better or worse off than she was before.
d.The share price would have to fall to the issue price per share, or €5 per share. Firm value would then be: 10 million ( €5 = €50 million
21.a.(i)The tax-free investor should buy on the with-dividend date because the dividend is worth $1 and the price decrease is only $0.90. ii) The dividend is worth only $0.60 to the taxable investor who is subject to a 40% marginal tax rate. Therefore, this investor should buy on the ex-dividend date. [Actually, the taxable investor’s problem is a little more complicated. By buying at the ex-dividend price, this investor increases the capital gain that is eventually reported upon the sale of the asset. At most, however, this will cost: (0.16 ( 0.90) = $0.14 This is not enough to offset the tax on the dividend.]
b.The marginal investor, by definition, must be indifferent between buying with-dividend or ex-dividend. If we let T represent the marginal tax rate on dividends, then the marginal tax rate on capital gains is (0.4T). In order for the net extra return from buying with-dividend (instead of ex-dividend) to be zero: –Extra investment + After-tax dividend + Reduction in capital gains tax = 0 Therefore, per dollar of dividend:
–0.85 + [(1 – T) ( 1.00] + [0.4T ( 0.85] = 0 T = 0.227 = 22.7%
c.We would expect the high-payout stocks to show the largest decline per dollar of dividends paid because...