Shares of Markely, Inc. stock are currently priced at $43.78. The stock goes ex-dividend tomorrow in preparation for a $.60 quarterly dividend. The average shareholder faces a marginal tax rate of
30% and the company has a cost of equity of 12% and a 35% tax rate. At what price should the
Stock open tomorrow, all else constant?

Question

Quizplus · Accepted Answer

To calculate the ex-dividend price of the stock, we need to subtract the amount of the dividend from the current stock price and adjust for any taxes owed by shareholders.

The after-tax dividend is: 
$0.60 * (1 - 0.35) = $0.39

The price per share ex-dividend is: 
$43.78 - $0.39 = $43.39

However, we need to adjust for shareholder taxes. The tax owed on the dividend is: 
$0.60 * 0.30 = $0.18

Therefore, the ex-dividend price per share after taxes is: 
$43.39 - $0.18 = $43.21

However, we need to adjust for the fact that the cost of equity for the company is 12%, which is higher than the ex-dividend yield of: 
$0.60 / $43.78 = 1.37%

To adjust for this, we calculate the present value of the dividend using the cost of equity: 
PV(dividend) = $0.60 / (1 + 0.12) = $0.54

The ex-dividend price per share after adjusting for the present value of the dividend is: 
$43.21 - $0.54 = $42.67

Finally, we add back in the after-tax dividend to get the ex-dividend price: 
$42.67 + $0.39 = $43.36

Therefore, the correct answer is C) $43.36