How does the Black-Scholes model handle dividends?

• A. It assumes dividends are ignored and cannot be adjusted.
• B. It assumes no dividends unless adjusted to reflect them.
• C. It requires explicit modeling of dividend timing for every stock.
• D. It prices options as if the dividend yield is zero.

Answer: (B)

The key idea is that Black-Scholes is built on a no-dividend baseline, and dividends are handled only if you adjust the model. By default, the formula assumes the underlying pays no dividends. If a stock does pay dividends, you reflect that by incorporating a dividend adjustment—either a continuous dividend yield (so the drift becomes r minus q, and the forward price is adjusted) or a discrete adjustment for known dividend payments. That makes the model capable of pricing when dividends exist, but the starting point remains the no-dividend assumption. The other statements either describe an incorrect rigidity or misstate when the adjustment occurs; you don’t price with a fixed zero-yield in all cases, you adjust to reflect the dividend situation.