Question

RRM Incorporated has just declared a dividend of $5.50 per share. The tax rate of dividends is 18 percent. The tax rate on capital gains is 0. The tax laws require the taxes to be withheld when the dividend is paid. RRM currently sells for $33 per share and the stock is about to go ex-dividend. What do you calculate the ex-dividend price will be?

A) 27.50

B) 28.49

C) 28.33

D) 31.57

Answer 1

Answer: Option B is correct.
Ex dividend price = Current price per share - Dividend per share * ( 1 - Tax rate of dividends)/( 1 - Tax rate on capital gains)
Substituting the values, we get;
Ex dividend price =33-5.50*(1-18%)/(1-0)=28.49