The ex-dividend date: ABC. Co is currently trading at $37.00 per share. The company is paying a regular cash dividend of $0.40 per share and an extra dividend of $0.10 per share. Tomorrow is the ex-dividend day. The tax rate on dividends is 15 percent. Assuming there is no new information released about the company, how much do you expect the company's stock to trade for tomorrow?

Question

Quizplus · Accepted Answer

The ex-dividend date signifies that shareholders who purchase the stock on or after this date are not entitled to the current dividend payment. Therefore, the stock price will typically adjust downward to reflect the amount of the dividend payment. 
In this case, the total dividend payment is $0.50 per share ($0.40 regular dividend + $0.10 extra dividend). With a tax rate of 15 percent, the after-tax dividend payment is $0.425 per share ($0.50 * (1-0.15)). 
To calculate the expected stock price on the ex-dividend date, we subtract the after-tax dividend payment from the previous day's closing price: 
$37.00 - $0.425 = $36.575
Rounding to the nearest cent, the expected stock price on the ex-dividend date is $36.58, which is closest to choice C.

The Ex-Dividend Date: ABC