Question

Lee Ann, Inc., has declared a $5.70 per-share dividend. Suppose capital gains are not taxed, but dividends are taxed at 20 percent. New IRS regulations require that taxes be withheld when the dividend is paid. The company's stock sells for $94.15 per share and is about to go ex-dividend.

Required:
What do you think the ex-dividend price will be?

Answer 1

$89.59

Step-by-step explanation:

After tax dividend = Dividend * (1-Tax)

After tax dividend = $5.70 * (1-20%)

After tax dividend = $5.70 * 0.8

After tax dividend = $4.56

Ex-Dividend price = Share price - After tax dividend

Ex-Dividend price = $94.15 - $4.56

Ex-Dividend price = $89.59