A companys management announces a 150 per share dividend pay

A company’s management announces a $1.50 per share dividend payment. Assuming all investors are subject to a 16 percent tax rate on dividends, what will the share price be on the ex-dividend date? (Round answers to 2 decimal places, e.g. 15.25.)

Price on the ex-dividend date should go down by $__________

Please show steps

Solution

When a company pays a dividend, the value of the company drops by the amount of the dividend. This fact can be difficult to observe for companies that pay small dividends, but you should be able to clearly see it in companies with big dividend yields, such as real estate investment trusts.

One way to think about a company\'s value is that it is equal to the value of earnings in the future plus the value of the assets that aren\'t needed to run the daily operations.

Put simply, on the ex-dividend date, the company is theoretically worth the previous day\'s closing price minus the upcoming dividend per share.

Dividend Received Per Share                                     = $ 1.5 Per Share

Less: Tax rate @ 16%

=

0.24

Net Dividend Received

1.26

So Price on the ex-dividend date should go down by $ 1.26 Per share