Mercury, Co. has announced it will pay its regular cash dividend of $0.45 per share. If dividends are taxed, about how much do you expect the price of Mercury stock to drop on the ex-dividend day? The tax rate on dividends is 15 percent. (Round your final answer to two decimal places.)

Question

Quizplus · Accepted Answer

On the ex-dividend day, the stock price usually drops by the amount of the dividend. In this case, the regular cash dividend is $0.45 per share, but it is taxed at a rate of 15 percent. Therefore, the after-tax dividend per share is $0.45 x (1 - 0.15) = $0.3825. This means that the stock price is likely to drop by approximately $0.38 per share on the ex-dividend day. The closest choice is B.