(One-period pricing. Recall that since stocks have really long lives, in the vid

Question

(One-period pricing. Recall that since stocks have really long lives, in the video we first imagined owning a stock for only one period. In this simple, yet powerful scenario, today's stock price is the PV of next year's dividend and next year's stock price.) The stock of Alydar Oil, an all-equity firm, is currently trading at $30 per share, after just having paid a $2.60 per share dividend. The market expects a dividend of $3.30 per share to be paid one year from today. If the equity cost of capital (same as discount rate for equity) is 13% for this firm, the expected ex-dividend price (the stock price after the dividend is paid next year) in one year (t = 1) should be closest to:

a)$32.77

b)$30.60

c)$33.90

d)$31.30

Explanation / Answer

Expected ex-dividend price = Current price*(1+ required rate) - Expected Dividend

Expected ex-dividend price = 30*(1+13%) - 3.30

Expected ex-dividend price = $ 30.60

Answer

b)$30.60

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.