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NISM Certifications · NISM-Series-XV: Research Analyst · Corporate Actions

A company with a share price of Rs 500 declares an interim dividend of Rs 20 per share. Which statement correctly describes the dividend yield and the usual price behaviour on the ex-dividend date?

The dividend yield is 4%, calculated as Rs 20 divided by Rs 500. On the ex-dividend date the share usually falls by about the dividend amount, because new buyers are no longer entitled to the payout.

  1. AYield is 4%; price tends to fall by about the dividend amount on ex-dateCorrect
  2. BYield is 4%; price tends to rise by the dividend amount on ex-date
  3. CYield is 25%; price tends to fall by the dividend amount
  4. DYield is 4%; price is unaffected because dividends are tax-free for the company

Explanation

Dividend yield = 20/500 = 4%. On the ex-dividend date, buyers no longer receive the dividend, so the price tends to drop by roughly the dividend amount. A 25% yield inverts the ratio.

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