JBK, Inc., normally pays an annual dividend. The last such dividend paid was $1.

Question

JBK, Inc., normally pays an annual dividend. The last such dividend paid was $1.60, all future dividends are expected to grow at 5 percent, 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 $16.10 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.)

Explanation / Answer

D0= 1.6 D2 = 1.6*1.05^2 stock price = 16/1.12 + (1.6*1.05^2/(12%-5%))/1.12 = $36.79

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