# Ex-dividend price change of stock

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When a stock goes ex-dividend, does the price of the stock drop by the amount of the dividend or does it equal dividend (1-div tax)/(1-cg tax)

By the amount of the dividend if Td=Tcg, which I believe is the case since 2003 in the U.S.

I tried a more intuitive formula for this, but didn’t find one.

If there is taxes for capital and dividends then it’s the second one if there isn’t then it’s just dividend. Most questions assume we’re in a perfect world so no taxes on both

A more intuitive approach will be that an investor is indifferent between a stock paying dividend or one that does not because receiving dividend will result in decrease in stock price. This means that after tax capital gains = after tax gains on dividends.

Thus,

(1 - Td) * dividend = (1 - Tc) * change in stock price

and

change in stock price = (1 - Td) * dividend / (1 - Tc)

g3r41d, that’s cool.

Dreary wrote:

g3r41d, that’s cool.

Thanks! I can’t really memorise formulas, thus will need to better understand how the formulas work so I can derive them.

That’s what I have been arguing all along….somewhere here I claimed that 40% of the formulas in the CFAI books can easily be derived, some are too obvious to worry about, and a few you have to memorize

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