MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.05
ID: 2755971 • Letter: M
Question
MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.05, 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 $24.80 per share that is not expected to affect any other future dividends, what should the stock price be?
MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.05, 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 $24.80 per share that is not expected to affect any other future dividends, what should the stock price be?
Explanation / Answer
In order to find the current price of the stock we need to find the price of the stock at year 2 Annual Dividend $ 2.05 P2 = (Dividend x (1+growth rate)) /( Expected rate - Growth rate) P2 = 2.05 x (1+.08) / (.13 - .08) $ 44.28 Now in order to find the P0 or current price we need to find the sum of present value of the next dividends and the present value of the price of the share at year 2 P0 = D /( 1+r)^1 + P2 / ( 1+r)^2 P0 = 24.80 / (1.13)^1 + 44.28 / (1.13)^2 $ 56.62 There fore the current price of the stock is $ 56.62
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