Your company has announced a dividend of $2.50 per share. You and the rest of the marginal investors are in the 35% tax bracket. What should happen to the stock price?

Question

Quizplus · Accepted Answer

The price of a stock typically decreases by the amount of the dividend after the ex-dividend date, adjusted for any taxes the investors have to pay on the dividend. In this case, with a $2.50 dividend and a 35% tax rate, the after-tax dividend is $2.50 * (1 - 0.35) = $1.625. Therefore, the stock price should decrease by $1.625 per share immediately after the ex-dividend date.

Your Company Has Announced a Dividend of $2