Question

Ginger, 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 at the time the dividend is paid.
The company's stock sells for $94.15 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 and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

$89.59

Explanation:

The computation of the ex-dividend price would be

= Sale price of the stock - after-tax dividend

where,  

The sale price of the stock would be $94.15

And, the after-tax dividend would be

= Dividend per share × (1 - tax rate)

= $5.70 × (1 -  0.20)

= $5.70 × 0.80

= $4.56

Now put these values to the above formula  

So, the value would equal to

= $94.15 - $4.56

= $89.59