Dividends and Taxes
Response to the following problem:
Lea SpA has declared a €6-per-share dividend. Italy has a gradual tax system, where higher tax rates are charged at higher salary bands. Capital gains are taxed, dependent on how long you hold the shares of the company, and the amount recorded for tax purposes is deflated by the inflation rate between the date of purchase and the date of sale. We're going to make things simple. Suppose the tax rate on capital gains and dividends is zero. Lea sells for €80 per share, and the equity is about to go ex dividend. What do you think the ex-dividend price will be?