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Question

Difficulty: HardSettlement Dates, Trade Confirmations, and Corporate Actions

A corporate board of directors declares a special cash dividend valued at 30%30\% of the company's market price. The board establishes the record date as Tuesday, October 13, and the payable date as Thursday, October 22. Under FINRA rules governing large corporate distributions of 25%25\% or more of a security's value, on which date will the stock begin trading ex-dividend?

  1. A
    Friday, October 9
  2. B
    Tuesday, October 13
  3. C
    Thursday, October 22
  4. Friday, October 23Answer

Answer

The stock will begin trading ex-dividend on Friday, October 23, which is the first business day following the payable date.
Under FINRA rules, when a corporate dividend or distribution equals or exceeds 25%25\% of the value of the underlying security, the standard regular-way ex-dividend date rule (one business day prior to the record date under T+1T+1 settlement) does not apply. Instead, the ex-dividend date is designated as the first business day following the payable date. Given that the payable date is Thursday, October 22, the ex-dividend date is Friday, October 23.

Step-by-Step Solution

1
Identify the dividend size relative to the threshold rule
The dividend is valued at 30%30\% of the stock's market value, which meets or exceeds the 25%25\% threshold for large distributions.
Special ex-dividend rules apply specifically when a distribution equals or exceeds 25%25\% of the security's value.
2
Apply the FINRA ex-dividend date rule for large cash distributions
Instead of the standard T+1T+1 rule (one business day prior to the record date), the ex-dividend date is set to the first business day after the payable date.
Because the distribution value is so large, trades made after the record date up to the payable date carry due-bills to ensure proper distribution alignment.
3
Determine the date following the payable date
The payable date is Thursday, October 22. The next business day is Friday, October 23.
Friday, October 23 is the precise day the stock begins trading ex-dividend without due-bills attached.

Key Concept

Special Ex-Dividend Date Rules for Large Cash Dividends
Estimated Time:1m 30s
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions