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# Dividends in the market

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Problem 1:
Midnight Hour Inc. has declared a \$5.10 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15%. New IRS regulations require that taxes be withheld at the time the dividend is paid. Midnight Hour sells for \$83 per share and the stock is about to go ex-dividend. What do you think the ex-dividend price will be?

Problem 7:
The market value balance sheet for Outbox Manufacturing is shown here. Outbox has declared a 25% stock dividend. The stock goes ex-dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 30,000 shares of stock outstanding. What will the ex-dividend price be?

Market Value Balance Sheet:

Cash: \$145,000 Debt: \$127,000
Fixed Assets: \$598,000 Equity: \$616,000
Total: \$743,000 Total: \$ 743,000

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#### Solution Preview

Problem 1:

Ex-dividend Price = Declared Dividend - (Declared Dividend x Tax Rate) = \$5.10 ...

#### Solution Summary

The dividends in the market are determined.

\$2.19
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## Calculate the market price of a stock in the given scenario.

The risk-free rate of return is 3 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 5 percent, and a current dividend of \$2.60 a share.

A) What should be the market price of the stock?
B) If the current market price of the stock is \$27, what should you do?
C) If the expected return on the market rises to 10 percent and the other variables remain constant, what will be the value of the stock?
D) If the risk-free return rises to 4.5 percent and the return on the market rises to 10.2 percent, what will be the value of the stock?
E) If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?
F) Explain why the stock's value changes in c through e?

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