Chapter 14, Problem 1OR

Summary Introduction

To determine: The date the stock goes on ex-dividend and whether the change in the stock price is surprising.

Explanation of Solution

Two day before the date of record is ex-dividend date. So in the case the ex-dividend date is May 15. Usually the stock price will drop by the amount of dividend during the ex-dividend whereas the stock price has gone up after the ex-dividend date so it is a surprising element.

Summary Introduction

To determine: The returns earned by the investor before the ex-dividend date.

Explanation of Solution

Given information:

Stock price before ex-dividend is $129, dividends of $0.625 per share, and market price of stock after the ex-dividend is $129.

The formula to calculate the returns:

$\text{Returns}=\frac{\text{Stock price before ex-dividend}+\text{Dividends}-\text{Stock price after the ex-dividend}}{\text{Stock price after the ex-dividend}}$

Compute the returns:

$\begin{array}{c}\text{Returns}=\frac{\text{Stock price before ex-dividend}+\text{Dividends}-\text{Stock price after the ex-dividend}}{\text{Stock price after the ex-dividend}}\\ =\frac{\$129.67+\$0.625-\$129}{\$129}\\ =1\%\end{array}$

Hence, the return is 1%.

Therefore, the return is not a much big return so the firm must have a capital to be invested in for a day to earn the required return.