Use the following information to answer the question(s)below.
Suppose that all capital gains are taxed at a 20% rate,and that the dividend tax rate is 40%.Rearden Metal is currently trading for $40 per share,and is about to pay a $5 special dividend.
-Absent any other trading frictions or news,Rearden's share price just after the dividend is paid will be closest to:
A)$35.
B)$36.
C)$37.
D)$40.

Question

Quizplus · Accepted Answer

When a company pays a dividend, its stock price will typically decrease by the amount of the dividend. Therefore, Rearden's share price will likely drop to $35 ($40 - $5) just after the special dividend is paid. However, because dividends are taxed at a higher rate than capital gains, some investors will choose to sell their shares before the dividend is paid to avoid the higher tax rate. This selling pressure could cause the share price to drop further, perhaps down to $36. Therefore, B) $36 is the closest answer choice.

Use the Following Information to Answer the Question(s)below