Following trading hours on July 20, 2004, Microsoft Corporation (symbol: MSFT) announced that it would pay a special dividend of $3.08 per share, with an ex-dividend date of November 15, 2004. The purpose of this question is to examine the MSFT stock price changes on the announcement date and the ex-dividend date.

a) Download daily price data for MSFT from Yahoo! Finance for the period June 30, 2004 to December 30, 2004. The daily price data can be found in the “Historical Data” section after going to the MSFT page on Yahoo! Finance. Graph the price series (use closing price, not adjusted closing price) and highlight the announcement date and ex-dividend date. You only need to provide the graph for this question.

b) In an efficient and frictionless environment with no information asymmetries, there should be no price change immediately following a dividend announcement. Looking at the data from part (a), what is the price change from the close of the announcement day (the closing price) to the open of the following day (the opening price)? Why do you think the price change is different from zero?

c) In an efficient and frictionless environment with no taxes or information asymmetries, the stock price decrease on the ex-dividend date should equal the dividend per share. Looking at the data from part (a), what is the price change from the close of the trading day preceding the ex-dividend date (the closing price on Friday, November 12, 2004) to the open of the ex-dividend date (the opening price on Monday, November 15, 2004)? Why do you think the price decrease is different from $3.08?