When a stock that pays a dividend is sold short, ______

A. all dividends accrue to the short seller.
B. the buyer of the stock must reimburse the short seller for all dividends.
C. the short seller must reimburse the lender of the stock for all dividends.
D. the short sale must be reversed on the ex-dividend date.

Correct Answer: C

Since the lender of the stock is not in possession of the stock when the dividend is paid, she will not receive it. Therefore, in order to leave the lender in an equivalent position to not having lent the stock, she must be reimbursed the dividend.