Question

Assume the stockholders of Colorado Springs stock are in the 25 percent tax bracket. The closing price of the stock today was $42.80 a share. The firm pays a quarterly dividend of $1.00 per share. What is the expected opening price of the stock tomorrow if tomorrow is an ex-dividend date?

$35.78

$38.91

$42.05

$46.65

$51.23

Answer 1

Ans

Before answering this question lets us understand the Relationship between :

• Stock Price {MPS}
• Dividend Declared {D} &
• Tax Rate on Dividends {t}

As we know that the Value of Share is only the Present Value of Futures Benefits that a Shareholder would get from such share during the holding period (ie. Dividends & Capital Appreciation at time of Selling Share).

The MPS of Share falls when any such Benefit is Declared out of such Sock since it will reduce the Future Benefits that would be derived from such stock.

So the MPS of share will Fall at two Stages in case of Declaration of Dividend :

STAGES OF FALL IN MPS IN CASE OF DIVIDEND DECLARATION	AMOUNT OF FALL
STAGE 1 : When Dividend is Announced	D * t
STAGE 2 : On Ex Dividend Date	D (1-t)

Now Answer to the Question :

Ex-Dividend Opening Price = Closing Price (-) { Dividend*(1-t) }

= $ 42.8 (-) {1*0.75}

= $ 42.8 (-) $0.75

= $ 42.05

HOPE YOU ARE CLEAR WITH THE SOLUTION NOW. STILL IF ANY DOUBT PLEASE ASK IN COMMENT :)