A stock that pays a dividend of $1.10 closed at $72 on the cum-dividend date. If the personal tax rate of the marginal investor is 40%, what would you expect the stock to open at on the
Ex-dividend date, all else equal?

Question

Quizplus · Accepted Answer

The stock is expected to drop by the after-tax value of the dividend on the ex-dividend date. The after-tax value of the dividend is $1.10 * (1 - 0.40) = $0.66. Therefore, the expected opening price on the ex-dividend date is $72 - $0.66 = $71.34.

A Stock That Pays a Dividend of $1