ESSENTIAL OF CORP FINANCE W/CONNECT
ESSENTIAL OF CORP FINANCE W/CONNECT
8th Edition
ISBN: 9781259903175
Author: Ross
Publisher: MCG CUSTOM
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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.

Expert Solution & Answer
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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:

Ex-dividend price=Selling priceAfter tax dividend

The formula to calculate the after tax dividend:

After tax dividend=(Dividend per share before tax(Dividend per share before tax×Tax rate))

Compute after tax dividend:

After tax dividend=(Dividend per share before tax(Dividend per share before tax×Tax rate))=$6($6×0.25)=$61.5=$4.5

Hence, the dividend after tax is $4.5.

Compute ex dividend price:

Ex-dividend price=Selling priceAfter tax dividend=$111$4.5=$106.5

Hence, the ex-dividend price is $106.5.

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