N Ltd shares have a closing price of $10.85 on 8 November 2005.On the next day they will begin trading on an ex-dividend basis.The dividend is 40 cents per share fully franked at the company tax rate of 30 per cent.What is the expected ex-dividend share price?

Question

Quizplus · Accepted Answer

Since the dividend is fully franked, it means that the company has already paid tax on the dividend at the rate of 30%. Therefore, to calculate the expected ex-dividend share price, we need to reduce the dividend amount by the tax rate and subtract it from the closing price. 
Expected ex-dividend share price = Closing price - (Dividend * (1 - Tax rate)) 
Expected ex-dividend share price = $10.85 - (0.4 * (1 - 0.3)) 
Expected ex-dividend share price = $10.28 
Therefore, the expected ex-dividend share price is $10.28, which is closest to option C.

N Ltd Shares Have a Closing Price of $10