Miller, Inc., has declared a $6.10 per share dividend. Suppose capital gains are
ID: 2715619 • Letter: M
Question
Miller, Inc., has declared a $6.10 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 10 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Miller sells for $112 per share, and the stock is about to go ex-dividend.
What do you think the ex-dividend price will be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Required:What do you think the ex-dividend price will be? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Dividend tax = 6.10 * 10% = 0.61
Ex Dividend Stock Price = 112 - 6.10 - 0.61
This is because as soon as dividends are paid, stock price falls down by the dividend amount. This makes sense because afer declaring dividend the company is left with less cash and the price of the stock is derived out of the assets available with the company
In the present case, company pays tax of 0.61 and dividend of 6.10