Suppose a stock is slated to pay a $2 dividend per share nextweek. As soon...

Suppose a stock is slated to pay a $2 dividend per share next week. As soon as we pass the ex-dividend date, and all else equal, we would expect the price of the stock to:

Select one:

a. Increase $2

b. Stay the same

c. Decrease $2

d. Increase by "Beta times $2"

Solutions

Expert Solution

Answer is (C) " Decrease $2 "

When a company declares divident , it sets a record date when you must be on the company's books as a shareholder to receive the dividend. This date is known as "ex dividend date"

The ex dividend date is usually set one business day before the record date. If you purchase before the ex - dividend date then you get the dividend.

But after a stock pass ex dividend , the share price typically drops by the amount of the dividend paid to reflect the fact that the new shareholders are not entitled for the paymen. Instead the seller gets the dividend.

Rahul Sunny answered 2 years ago

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