MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.85
ID: 2753948 • Letter: M
Question
MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.85, 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 13 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $25.60 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
Termainal value for year 1 = D2 /(Rs-g)
= 2.85(1+.08)(1 +.08 ) / (.13-.08)
= 2.85 *1.08*1.08 /.05
= $ 3.324 /.05
= 66.48
Price of stock now = (D1 *PVF@13%, 1 ) +(Terminal value *PVF@13%,1)
= (25.60 * .88496)+(66.48*.88496)
= 22.65+ 58.53
= 81.48 Per share
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