WXY Inc. declared a dividend on July 27, 2004 to be payable on September 10, 2004....

WXY Inc. declared a dividend on July 27, 2004 to be payable on September 10, 2004. The list of shareholders who would be entitled to this dividend would be prepared on August 10, 2004.

a) Identify the key dates involved with dividend payment (4 points)

b) If Tom bought some shares on August 7, 2004, would he have received the dividend declared for this period? If not, who would receive it? (3 points)

c) You buy a share of stock before the ex‐dividend date for US$15. The dividend declared is US$1.50 per share. Ignoring the effect of taxes, does the value of your investment increase after the ex‐dividend date? Does it decrease? Why? Why not? (3 points)

Expert Solution

a) The key dates are dividend payment are:

Dividend declaration day : The day the dividend is declared, which is July 27th , 2004.
Ex dividend date : Ex dividend date, is one business day before the record date, which is 9th August ,2004
Record date: The record date, is the day the shareholders who are entitled to receive the dividend are prepared, which as per this problem is August 10th, 2004.
Dividend payment: The day the dividend is finally paid to the investors, which us September 10,2004.

b) Only if an investor buys the share, before the ex -dividend date, he would be eligible for dividend. So, If WXY has bought the shares on August 7th, he will be entitled to dividend. Yes he will receive the dividend.

c) The value of the investments will decrease, after the ex -dividend date. The stock price falls by the amount of dividend because once dividend is paid, that amount no longer belongs to the company and so the market cap of the company is reduced by that amount if the dividend as a result its shares prices fall. So, due to the fall in share prices the value of the investments also fall.

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