The HNH Corporation will pay a constant dividend of $ 1.25 per share, per year,
ID: 2796852 • Letter: T
Question
The HNH Corporation will pay a constant dividend of $ 1.25 per share, per year, in perpetuity. Assume all investors pay a 25 % tax on dividends and that there is no capital gains tax. The cost of capital for investing in HNH stock is 11 % . a. What is the price of a share of HNH stock? b. Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of HNH stock now? a. What is the price of a share of HNH stock? The price of a share of HNH stock is $nothing . (Round to the nearest cent.)
Explanation / Answer
a)
Price of the stock = Dividend( 1-tax rate) / cost of capital
= 1.25(1-0.25) / 0.11
= 8.522
b)
If there is no dividend and share repurchase happens then
Price of the stock = Dividend / cost of capital
= 1.25/0.11
= 11.36
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