Twelve days ago, DOG, Inc. declared a dividend of $1.34 a share. The ex-dividend

Question

Twelve days ago, DOG, Inc. declared a dividend of $1.34 a share. The ex-dividend date is tomorrow. All else constant, which one of the following is the best estimate of DOG, Inc.'s opening stock price tomorrow?

$1.34 lower than today's closing price

Today's closing price minus an amount approximately equal to the aftertax value of the dividend

The same as today's closing price since the dividend is expected

$1.34 higher than today's closing price

Today's closing price plus an amount approximately equal to the aftertax value of the dividend

Explanation / Answer

Theoritically, the price of share is expected to fall by the amount equal to Dividend amount on the ex-dividend date. Since, DOG, Inc. declared a dividend of $1.34 a share, its price is going to fall approximately by $1.34, however dividends are taxable at pre defined. So in reality, the price on ex-dividend date is going to fall by after tax value of dividend received. If the dividend tax rates are not fixed, then it becomes to difficult to calculate the after tax value of dividend.

Hence, the correct answer is Option B - Today's closing price minus an amount approximately equal to the aftertax value of the dividend.

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