Ex-dividend price change of stock

CFA Level II Corporate Finance
#1

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)

#2

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.

#3

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

#4

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)

#5

g3r41d, that’s cool.

#6

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

#7

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