Question

Question 7

ABC has just announced that is is planning to pay a dividend of $3.9 per share. Before the announcement the share price of ABC was $37.7. Assume that the tax rate on capital gains is 15%, the tax rate on dividends is 3%. By how much will you expect the share price of ABC to change on the ex-date. Round your answers to two decimals (do not include the $-symbol in your answer). If you expect a positive change (share price will increase) enter a positive number. If you expect a negative change (share price will decline) enter a negative number.

Answer 1

Solution:

It's Given that ABC has just announced that it is planning to pay a dividend of 3.9 per share.

> Before the ex-date announcement , investors wants to buy more share of the company to get the dividend and would pay the premium on the current share price of 37.7 upto ( Dividend amount(3.9) - 3% tax on dividend - 15% capital gain tax)

> so to calculate the increse in Stock price before ex-date

We need to calculate gain to investor per share on dividend amount after paying dividend tax 3% per share and capital gain tax @ 15 %

= 3.9 - (3% of 3.9) - ( 15% of 3.9)

= 3.9 - 0.117 - 0.585

= 3.198

So the Share price before the ex-dividend = 37.7 + 3.198

= 40.898

>On the ex-date investor would have a sentiment that company has given away money of the order of 3.9 per share and hence the new investor on ex-date would quote lower share price upto extent of dividend amount on the share price of the ABC on the day when it has announced about the dividend payout.

> so Share price of ABC on ex-date would be = 37.7 - 3.9

= 33.8

>So the change in share price on the ex-date and before the ex-date would be

= 33.8 - 40.898

= -7.10

Answer : The change in share price of ABC on ex-date would be - 7.10