1. An individual investor pays taxes of 28 percent on the next dollar of dividend income and taxes of 15 percent on the next dollar of capital gains. Which would she prefer: $1 in dividends or $0.87 in capital gains?

2. Suppose the tax rate on capital gains is 20 percent for all investors but the tax rate on dividend income differs among investors. A share drops by 70 percent of the amount of the dividend, on average, when the share goes ex-dividend. Assume that any appropriate corrections for equity market price movements on ex-dividend days have been made. Calculate the marginal tax rate on dividend income applying to those who trade the issue around the ex-dividend day.

3. Consider a U.S. corporation with a corporate income tax rate of 40 percent. The corporation needs to report as taxable income only 30 percent of dividends received from other corporations—that is, it takes a 70 percent deduction on that type of dividend income in calculating taxes owed. Assume that both capital gains and reported dividends (dividends net of any deductible amount) are taxed at 40 percent. What is $1 of dividends worth in terms of capital gains for such a corporate investor?

4. Explain why the ex-dividend share price would be expected to drop by more than the amount of the dividend if such investors as the corporation described in question 3 are the marginal trader in the issue.

5. For a given share issue, the share price consistently drops by an amount very close to the amount of the dividend when the share goes ex-dividend. Describe the marginal investor in the shares.