The ex-dividend date: Harbourside Co is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and a special dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 per cent. Assuming there is no new information released about the company, how much do you expect the company's shares to trade for tomorrow?
A) $36.43
B) $36.50
C) $36.58
D) $37.00

Question

Quizplus · Accepted Answer

The ex-dividend date is the date on and after which a stock trades without its dividend. Therefore, tomorrow the stock will open with the value adjusted for the dividend. The adjustment will remove the $0.40 regular dividend and $0.10 special dividend from the stock price, making the theoretical price drop to $36.50 ($37.00 - $0.50). Also, the tax rate on dividends is 15 per cent, which will lower the effective dividend payment to $0.34 for the regular dividend ($0.40 x (1-0.15)) and $0.085 ($0.10 x (1-0.15)) for the special dividend. Therefore, the expected opening price is $36.58 ($36.50 + $0.34 + $0.085). Choice C is the best answer.

The Ex-Dividend Date: Harbourside Co Is Currently Trading at $37