Following trading hours on April 25, 2017, Costco Wholesale Corporation (symbol: COST) announced that it would pay a special dividend of $7.00 per share in early May. The ex-dividend date for this special dividend was May 8, 2017. Thus, if you held COST stock at the beginning of May 8, 2017, you would have been paid the special dividend of $7 per share. Otherwise, you would have not received the special dividend. The purpose of this question is to examine the COST price reaction on the announcement date and ex-dividend date.

b) Theoretically, in a frictionless environment with no taxes or signaling effects, what should be theCOST price change immediately following the special dividend announcement? What should be the COST price change on the ex-dividend date?

c) What is the change in stock price from the close of the announcement day to the close of the following business day? If this is different from your answer in part (b), provide a possible explanation for the difference.