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Question

Difficulty: MediumSettlement Dates, Trade Confirmations, and Corporate Actions

A corporation's board of directors declares a quarterly cash dividend on its common stock, setting a record date of Thursday, October 15. Under standard regular-way T+1 settlement rules, on which date will the stock begin trading ex-dividend?

  1. Wednesday, October 14Answer
  2. B
    Tuesday, October 13
  3. C
    Monday, October 12
  4. D
    Friday, October 16

Answer

Wednesday, October 14 is the ex-dividend date under standard regular-way T+1 settlement rules.
Under regular-way T+1 settlement, securities transactions settle one business day after the trade date. To be a shareholder of record on Thursday, October 15, an investor must purchase the stock no later than Tuesday, October 13 (which settles Wednesday, October 14). Starting Wednesday, October 14 (one business day prior to record date), purchases will settle after the record date, so the stock trades ex-dividend (without the right to receive the dividend).

Step-by-Step Solution

1
Identify the declared record date and dividend settlement rules
Record date is Thursday, October 15; regular-way settlement for equities is T+1 (one business day after trade date).
To receive a declared cash dividend, an investor's trade must settle on or before the record date.
2
Calculate the ex-dividend date relative to the record date
Subtract one business day from Thursday, October 15 to get Wednesday, October 14.
Since settlement takes T+1 (one business day), a trade executed on Wednesday, October 14 will settle on Thursday, October 15 (the record date). Anyone buying on Wednesday, October 14 or later buys 'ex-dividend' (without the dividend).

Key Concept

Ex-Dividend Date Calculation under T+1 Settlement
Estimated Time:1m 0s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions