SIE Exam Question 116: Answer and Explanation

Question: 116

Assuming rational market behavior, what should the opening price of ABC Corporation be on December 6?

On Monday, December 5, after trading for that day ceased, ABC Corporation declared that it would pay an unanticipated $0.25 dividend, payable on December 15. The December 5 closing price of ABC Corporation stock is $25.34

• A. $25.34
• B. $25.09
• C. $25.59
• D. Not enough information given

Correct Answer: C

Explanation:

The opening price of ABC Corporation should be $25.59 on December 6 ($25.34 + $0.25). Since a dividend of $0.25 per share was announced after the market closed on December 5, each share became more valuable by that amount. It's always possible for stocks to not trade at what they're supposed to, given a free market, but assuming rational market behavior, ABC stock would trade at the sum of its closing price ($25.34) plus the declared dividend amount ($0.25): $25.59.