CFA Practice Question

There are 131 practice questions for this study session.

CFA Practice Question

For a given share issue, the share price consistently drops by an amount very close to the amount of the dividend when the share goes ex-dividend. What is unlikely about the marginal investor in the shares?

A. The marginal investor is a tax-exempt investor.
B. The marginal investor has the same marginal tax rate on dividends and capital gains.
C. The marginal investor is most likely an average investor with higher marginal tax rate on dividends than on capital gains.
Correct Answer: C

User Contributed Comments 2

User Comment
ericczhang Can anyone explain?
Tlhogi The marginal investor is likely to be part of the next trade in the share. If you refer to the book, the equation equating cash flows from selling the share before, and after it goes ex- div, when solved for the amt of price decrease is:
Pw- Px = D(1-Td)/(1-Tcg)
So depending on his tax rates for dividends vs capital gain, the share price will drop by:

1)an equal amt to D if the investors marginal tax rates are similar or the investor is tax exempt.i.e Td~Tgc

2)less than D, if Td > Tcg

3)more than D, if Td < Tgc
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