JBK, Inc., normally pays an annual dividend. The last such dividend paid was $3.
ID: 2617364 • Letter: J
Question
JBK, Inc., normally pays an annual dividend. The last such dividend paid was $3.30, all future dividends are expected to grow at 5 percent, and the firm faces a required rate of return on equity of 10 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $17.80 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.)
JBK, Inc., normally pays an annual dividend. The last such dividend paid was $3.30, all future dividends are expected to grow at 5 percent, and the firm faces a required rate of return on equity of 10 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $17.80 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
Value of stock = Next year dividend/(r - g)
where r is return on equity and g is growth rate.
value of stock = 3.3 * 1.05/(.1 - .05)
= $69.3
Present value of extraordinary dividend = ($17.8 - 3.3*(1.05))/1.1 = $13.03
Stock price = $69.3 + 13.03 = $82.33
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