Question

TRUE OR FALSE: If on January 2, 2008, a company declares a dividend of $1.50 per share, payable on January 31, 2008, then the price of the stock should drop by approximately $1.50 on January 31.

Answer 1

False.

The stock price falls by approximatly $1.50 on ex-dividend date, not on the payment date. Generally, we should know about three dates to understanding this question in a better way.

Payment date is the date at which the dividends are to be paid. Record date tells who are all entitled to recieve the dividends. If anyone holds the shares by recorded date, they are entitled to recieve the dividends. Here comes the ex-dividend date. Usually, if any one buys these shares it usually takes 2-3 working days (based on the country) to settle down by the exchanges. To recieve the dividends, anyone should buy the shares before 2-3 working days. If anyone buys after 2-3 days but before the recored date are not entitled to recieve the dividends.

My point here is that, 2-3 days (settlement based on the country) earlier than the recorded date is called as ex-dividend date. On this ex-dividend date, the stock price falls by $1.50 as per the question