The ex-dividend date: Cronulla Brewing Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed at 15 per cent, about how much do you expect the price of Cronulla Brewing to drop on the ex-dividend day?
A) $0.07
B) $0.38
C) $0.45
D) $0.52

Question

Quizplus · Accepted Answer

On the ex-dividend date, the stock price is expected to drop by the amount of the dividend ($0.45), since investors who buy the stock on or after the ex-dividend date are not entitled to receive the upcoming dividend payment. However, since dividends are taxed at 15%, the drop in price is expected to be slightly less than $0.45, which is equal to 85% of the dividend payout. Therefore, the expected drop in price is $0.38, which is closest to option B.

The Ex-Dividend Date: Cronulla Brewing Co