Question

The Green Fiddle has declared a $5 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Green Fiddle stock sells for $71.50 per share, and the stock is about to go ex-dividend. What will be the ex-dividend price

Answer 1

Answer: $67.25

Explanation:

We should note that in a scenario whereby the stock goes ex-dividend, there'll be a reduction in the stock price. This can be calculated as:

Dividend = $5

Dividend after tax = $5 × (1 - tax rate)

= $5 × (1 - 15%)

= $5 × (1 - 0.15)

= $5 × 0.85

= $4.25

Then, the ex dividend price will then be:

= $71.50 - $4.25

= $67.25