Question

4. In order to receive the special dividend that the firm announced on July 20, 2020, what is the latest date on which you have to purchase the firm's stock, which is publicly traded in the US markets only? A) End of Day of the Declaration date B) The day before the Ex-dividend date C) End of Day of the Record date End of Day of the Ex-dividend date E) The day before the Record date

Answer 1

B) The day before the ex-dividend date

The dividend payment follows the following key dates in sequential order

1. Dividend declaration date - The date on which dividend is declared

2. Ex-dividend date - The date on which (also any date after this date) a new buyer of shares of the company will not receive dividend

3. Record date - The date on which company checks and identifies shareholders for making dividend payment. Only shareholders whose name appears in records on record date receive dividends. Record date is a day after the ex-dividend date.

4. Dividend payment date - The day on which dividend is paid.

Only the shareholders whose name appears in the records on the Record Date receive dividend.

Since the exchanges follow a T+2 day settlement cycle, a buyer who buys shares on a day before ex-dividend date will have his name registered as a shareholder on record date (2 days after buying the shares)

If the share is bought on the end of the day of declaration date and if he continues to hold it till a day prior to ex dividend rate, he will receive the dividend.

If the share is bought on the end of the day of record date, his name will appear in records 2 days later. He would not be a shareholder on record date, hence no dividend.

If the share is bought on ex-dividend date, it will appear in records 2 days later (because of T+2 day settlement cycle), which is a day after record date, hence no dividend will be paid.

If the share is bought on the day before the record date (which would be the ex-dividend date), it will appear in records 2 days later (because of T+2 day settlement cycle), which is a day after record date, hence no dividend will be paid.