A firm announced that it will pay a $0.10 dividend per share to holders of record...

A firm announced that it will pay a $0.10 dividend per share to holders of record as of Wednesday, July 29, 2020. Holding all else constant, the stock price will be lower by $0.10 per share at the opening of trading on

A) Monday, July 27, 2020
B) Tuesday, July 28, 2020.
C) Wednesday, July 29, 2020.
D) Thursday, July 20, 2020
E) The stock price will not be lower on any of the above days.

Expert Solution

Sol:

A firm announced that it will pay a $0.10 dividend per share to holders of record as of Wednesday, July 29, 2020. Holding all else constant, the stock price will be lower by $0.10 per share at the opening of trading on Tuesday, July 28, 2020.

Answer: B) Tuesday, July 28, 2020.

Stock settlement takes place on trading day (T) + 2 bases. So if you trade a share on particular day its effect will reflect after two business days in company record books. So you need to buy a share at least two days before the record date to make sure that your buy entry reflects in company record book. To be eligible for dividend you should buy shares one day on or before the ex-dividend date. If you buy shares on ex-dividend day which is one day before record day then you will not be eligible for dividend as your buy entry will reflect in company record after the record day.

In our case, record date is Wednesday, July 29, 2020. It means that ex-dividend date will be Tuesday, July 28, 2020. The stock price will be lower by $0.10 per share at the opening of trading on Tuesday, July 28,2020 which is ex-dividend date as the market mark down the stock price by the amount of divided paid by the company on its ex-dividend date.

jeff jeffy answered 2 years ago

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