Gen Corp. is expected to pay a dividend of $3.10 per year indefinitely. The appr
ID: 1175555 • Letter: G
Question
Gen Corp. is expected to pay a dividend of $3.10 per year indefinitely. The appropriate rate of return on this stock is 10 percent per year, and the stock consistently goes ex-dividend 30 days before dividend payment date.
What will be the expected minimum price in light of the dividend payment logistics? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)
What will be the expected maximum price in light of the dividend payment logistics?
Explanation / Answer
1. Minimum Stock Price = P0 = (Annual Dividend / Rate of return ) * ( 1 / (1.10^(1/365))^30)
Minimum Stock Price = P0 = ($3.10/.10)x (1/[(1 + 0.000261)30thpower]
Minimum Stock Price = P0 = ($31)x (1/[(1 + 0.000261)30thpower]
Minimum Stock Price = P0 = $30.76
2. Maximum Stock Price = P0 = (Annual Dividend / (1.10^(1/365))^30) ) + (Annual Dividend / Rate of return ) * ( 1 / (1.10^(1/365))^30)
Maximum Stock Price = P0 = $3.10 / (1/[(1 + 0.000261)30thpower] + ($3.10/.10)x (1/[(1 + 0.000261)30thpower]
Maximum Stock Price = P0 = $3.12 + ($31)x (1/[(1 + 0.000261)30thpower]
Maximum Stock Price = P0 = $33.88
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