Call option value with and without dividends

CFA Level II Derivatives
#1

Compared to the value of a call option on a stock with no dividends, a call option on an identical stock expected to pay a dividend during the term of the option will have a:

A)higher value only if it is an American style option.

:camera:B)lower value only if it is an American style option

.:camera:C)lower value in all cases.

Can someone explain how C is correct? My logic of thinking must be wrong. I was thinking if a stock pays a dividend that will lower the price of the stock and the difference between the call price and the current stock price increases so I thought it would be higher if you can exercise early.

Please help.

#2

What happens to a company’s stock price when it pays a dividend? The price of the stock goes down (aka ex-dividend). That is going to reduce the value of a call option compared to a company that keeps that cash on its balance sheet.

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