Question

They have announced a fully franked dividend of $1 per share. The company tax rate is 27.5 per cent. How much should the share price fall on the ex-dividend date, if franking credits are fully valued?

Answer 1

Dividend are taxed double when the company will be distributing the profit but in the Frankie Credit system the dividend will be e provided with the credit to the shareholder and hence,the company will be paying the corporate tax on the Dividend and Frankie credits will mean that the dividend which had been declared has already been adjusted with the taxation.

(Dividend payment)/(1-tax rate)

= 1/(1-.275)

= $ 1.379 or 1.38

Hence, the companies share price should be falling after including the effect of the dividend by $ 1.38.