MCorp is incorporated in Hong Kong which has no taxes on capital gains and dividends. The company is expected to generate earnings of $3 per share, per year, in perpetuity with the first earnings is next year. The company distributes all its annual earnings by annual dividend. The cost of capital of the company is 10%.

a) What is the stock price of MCorp?

b) Assume that management makes a surprise announcement that Markus will no longer pay dividends but will distribute earnings by repurchasing stocks instead. What is the post- announcement stock price?

Given the current political uncertainty, MCorp plans to incorporate in the U.S. However, its shareholders will face a capital gains tax rate of 20% and a dividend tax rate of 40%. Suppose Markus decides to incorporate in the U.S.

c) What is the stock price of MCorp if the company distributes earnings by dividend?

d) What is the stock price of MCorp if the company distributes earnings by repurchasing stocks instead.

Suppose the U.S. government gives a special lump sum subsidy to Markus. This allows the company to pay a $5 special dividend today. Assume Markus distributes earnings by paying dividend.

e) What is the stock price of MCorp after the dividend is paid?

f) What is the effective dividend tax rate for a shareholder of MCorp?

g) Suppose that MCorp made a surprise announcement that it would do a share repurchase rather than pay a special dividend, what is the net tax savings per share for an investor that would result from this decision?

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