MMK Cos. normally pays an annual dividend. The last such dividend paid was $3.25
ID: 2615975 • Letter: M
Question
MMK Cos. normally pays an annual dividend. The last such dividend paid was $3.25, all future dividends are expected to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $26.00 per share that is not expected to affect any other future dividends, what should the stock price be?
MMK Cos. normally pays an annual dividend. The last such dividend paid was $3.25, all future dividends are expected to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $26.00 per share that is not expected to affect any other future dividends, what should the stock price be?
Explanation / Answer
Stock Price = $68.92
Firstly, Calculate the price of the ordinary Dividend
P0 = D0[ 1 + g ] / [ Ke – g ]
= $3.25[1.05] / [0.12-0.05]
= $3.4125 / 0.07
= $48.75
Second Step, Next dividend Will be $26 - $3.4125 = $22.5875 higher than the model accounts, Therefore, we should add the present value of $22.5875 to find the actual value of the stock price
Stock Price = $48.75 + [$22.5875 / 1.12 ]
= $48.75 + $20.17
= $68.92
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