MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.15
ID: 2618352 • Letter: M
Question
MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.15, all future dividends are expected to grow at a rate of 8 percent per year, and the firm faces a required rate of return on equity of 14 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $24.90 per share that is not expected to affect any other future dividends, what should the stock price be?
(Do not round intermediate calculations and round your final answer to 2 decimal places.)
Stock Price $ ________________
Explanation / Answer
Last Dividend, D0 = $2.15
Constant growth rate, g = 8%
Required rate of return, r = 14%
Extraordinary dividend = $24.90
D2 = D0 * (1 + g)^2
D2 = $2.15 * 1.08^2
D2 = $2.5078
P1 = D2 / (r - g)
P1 = $2.5078 / (0.14 - 0.08)
P1 = $2.5078 / 0.06
P1 = $41.7867
P0 = $24.90/1.14 + $41.7867/1.14
P0 = $58.50
So, stock price is $58.50
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