Question

Your portfolio contains 500 shares of Walmart Stock that currently sells for $98 a share. The company has announced a cash dividend of $2.04 per share with an ex-dividend date of tomorrow. Assume there are no taxes. What should you expect your portfolio value to be tomorrow morning assuming all else is held constant?

Answer 1

When a dividend is declared by the company the prices of the stock increases before the ex-dividend date. This is because the declaration of dividend encourages the investors to buy the stock because they know the will get the dividend if the stock is purchased before ex-dividend date. For this purpose investors are ready to pay the premium to buy the stock and hence this leads to increase in the price of stock. Generally the increase in price is equal to dividend amount if other factors remain the same.

If the stocks are purchased on or after ex-dividend date, the person will not be entitled to current dividend payment. Hence ideally on Ex-dividend date the prices of the stock decreases by the amount of dividend assuming all else is held constant.

Ans : Thus,

On Ex-dividend the Price of Walmart Stock will be = Current Price - Dividend per share
= $98 - $2.04
= $95.96 per share

Value of Portfolio on Ex-dividend date = 500 shares * $95.96 per share
= $47,980