Which of the following statements is correct for stock purchased on the last day to trade "cum dividend"?
A)a dividend will be declared on the next trading day.
B)a dividend will be paid on the next trading day.
C)the stock price should decline on the next trading day.
D)the stock price should have declined on the previous trading day.

Question

Quizplus · Accepted Answer

When a stock is purchased on the last day to trade "cum dividend," which is the last day to be eligible for a dividend payment, the stock price should decline on the next trading day. This is because the dividend payment is taken out of the stock price, so the price is adjusted downwards to reflect the fact that investors who purchase the stock after the ex-dividend date are not entitled to the upcoming dividend payment. Option A is incorrect because the declaration of a dividend typically occurs before the ex-dividend date, not after. Option B is also incorrect because the dividend is typically paid out a few weeks after the ex-dividend date, not on the next trading day. Option D is not relevant to the question, as it pertains to the previous trading day, which is not the focus of the question.

Which of the Following Statements Is Correct for Stock Purchased