MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65

Question

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65, 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 $25.40 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.)

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65, 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 $25.40 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

The stock price will be the PV of the dividend of $25.4 of the next year + PV of the expected price at the beginning of the 1st year.

PV of the expected price at the end of the first year is to be found out by using the dividend growth model of

D2/(Ke - g) = D0*(1+g)^2/(Ke-g)

= 25.4/1.12 + [2.65*1.05^2/(0.12-0.05)/1.12 = 22.67 + 37.27 = $59.94.

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

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