Question

ABC, Inc. has just announced today that it would pay $1/share dividends to each shareholder of record on June 5, 2019 (Wed). Its current share price is $30 and its shareholders’ average tax rate is 30%. Assume that there are no other news or developments that will affect the stock prices between now and the dates:

(A) What will likely be the price of its stock on June 4, 2019 (Tue)?

(B) What will likely be the price on June 3 (Mon)?   

(C) Instead of paying $1 in cash, the company announced today that it would use the aggregate equivalent of $1/share dividends to buy back outstand shares, would its share price increase or decline upon the announcement? Explain.

Answer 1

June 5th 2019 (Wednesday ) is the record date

current price = $.30

Average tax rate= 30

we can assume that the exchange sets the ex-dividend date one day prior to the record date

a. Ex-dividend Date = June 4, 2019, it is the date at which, the share will start trading without the dividend. So, the price will be 30-1 = $29

b. June 3, 2019, the share will trade as it is i.e at $30

c. The buyback reduces the number of outstanding shares, as a result, the buyback will increase the earnings per share which result in an increase in the share price upon announcement and also the company generally sets the price higher than the market price, therefore the market price will increase.