JBK, Inc., normally pays an annual dividend. The last such dividend paid was $1.

Question

JBK, Inc., normally pays an annual dividend. The last such dividend paid was $1.60, all future dividends are expected to grow at 5 percent, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $16.10 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 $1.60, all future dividends are expected to grow at 5 percent, and the firm faces a required rate of return on equity of 12 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $16.10 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

Hi,

Please find the answer as follows:

Stock Price = D1/(ke - g)

D0 = 1.60

Dx = 16.10

D1 = 1.60*(1+.05) = 1.68

Regular Stock Price = 1.68/(.12 - .05) = 24

Extraordinary Price = (16.10 - 1.68)/(1+.12) = 12.875

Total Value = 24 + 12.875 = 36.875 or 36.88

Answer is 36.88.

Thanks.

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