Chapter 14, Problem 14.2C

Summary Introduction

To calculate: Ex-dividend rate.

Introduction:

Ex-dividend price: The date between the announcement date and payment date is ex-dividend date. A stock which trades on ex-dividend date is termed as stock on ex-dividend. A stock becomes ex-dividend, when the person gets the payment of dividend.

Answer to Problem 14.2C

Ex-dividend price is $106.5.

Explanation of Solution

Given information:

P Incorporation declares a dividend at $6 per share; the rate of tax of dividends is at 25%. New regulation declares that during the time of payment of dividends, taxes were withheld. The selling prices of stocks are $111 per share and the stock goes to ex-dividend.

Formulae:

The formula to calculate the ex-dividend price:

$\text{Ex-dividend price}=\text{Selling price}-\text{After tax dividend}$

The formula to calculate the after tax dividend:

$\text{After tax dividend}=\left(\begin{array}{l}\text{Dividend per share before tax}\\ -\left(\begin{array}{l}\text{Dividend per share before tax}\\ \times \text{Tax rate}\end{array}\right)\end{array}\right)$

Compute after tax dividend:

$\begin{array}{c}\text{After tax dividend}=\left(\begin{array}{l}\text{Dividend per share before tax}\\ -\left(\begin{array}{l}\text{Dividend per share before tax}\\ \times \text{Tax rate}\end{array}\right)\end{array}\right)\\ =\$6-\left(\$6\times 0.25\right)\\ =\$6-1.5\\ =\$4.5\end{array}$

Hence, the dividend after tax is $4.5.

Compute ex dividend price:

$\begin{array}{c}\text{Ex-dividend price}=\text{Selling price}-\text{After tax dividend}\\ =\$111-\$4.5\\ =\$106.5\end{array}$

Hence, the ex-dividend price is $106.5.