Under what conditions might dividend policy affect the value of the firm?
According to federal tax law, corporations need not pay taxes on 80% of dividends received from shares held in other corporations.
In other words, only 20% of the dividends received by a corporate holder are taxable.
Given this fact, how much must the price of a stock fall on the ex-dividend date in order to prevent a corporate holder from making arbitrage profits?
Assume that the capital gains rate equals the corporate tax rate, i, = .5.