Blue Mountain Roasters Inc. only pays dividends to its shareholders. The current share price is $20, the company has…

Blue Mountain Roasters Inc. only pays dividends to its shareholders. The current share price is $20, the company has…

Question:

 

Transcribed Image Text:

Blue Mountain Roasters Inc. only pays dividends to its shareholders. The current share price is $20, the company has 75 million shares outstanding, $300 million in outstanding
debt, and $150 million in excess cash. Assume that the company will use all of its excess cash to pay its shareholders a dividend. For simplicity, also assume that the ex-date is
tomorrow and that the dividend will be paid on the ex-date. Assume that market are not perfect, and that the only market imperfection are taxes. If the tax rate on dividends is 20%
and the tax rate on capital gains is 15%, what will happen to the share price on the ex-date? Select the best one.
OLThe share price will decline to $17.95.
The share price will decline to $18.5
C.The share price will decline to $18.12.
ON. The share price will decline to $18
OV. Nothing, the share price will remain at $20,

Expert Answer:

Answer rating: 100% (QA)

The detailed answer for the above question is provided below The share price on the ex date will dec
View the full answer