Question 1 (of 4) value: 25.00 points Problem 6-2 JJ Industries will pay a regul

Question

Question 1 (of 4) value: 25.00 points Problem 6-2 JJ Industries will pay a regular dividend of $1.30 per share for each of the next four years. At the end of four years, the company will also pay out a liquidating dividend. If the discount rate is 7 percent, and the current share price Round your answer to 2 decimal places. Omit the "$" sign in your response.) is $54, what must the liquidating dividend be? (Do not round intermediate calculations. Liquidating dividend References eBook & Resources Worksheet Problem 6-2 25

Explanation / Answer

Part A

P0 = 54

D1 = 1.3

D2 = 1.3

D3 = 1.3

D4 = 1.3

Let Liquidating Dividend be D

54 = 1.3/ 1.07 + 1.3/ (1.07)2 + 1.3/(1.07)3 + 1.3/ (1.07)4 + D/ (1.07)4

54 = 4.40 + D/ (1.07)4

D = 49.60 * (1.07)4

D = 65.01

Part B

Price = D1/ (Discount Rate - Growth Rate)

41 = D1/ (12% - 4.1%)

D1 = 41 * (12% - 4.1%)

D1 = 3.24

D3 = 3.24 * 1.0412

D3 = 3.51

Part C

Price at end of 15 years

P15 = D16/(discount Rate - Growth Rate)

P15 = 2.6 * 1.036/ (13% - 3.6%)

P15 = 28.66

P0 = 28.66/ (1.13)15

P0 = 4.58

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