MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65

Question

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65, all future dividends are expected to grow at a rate of 5 percent per year, 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 $25.40 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.)

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.65, all future dividends are expected to grow at a rate of 5 percent per year, 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 $25.40 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

Using dividend growth model,

Stock price = Last dividend*(1+Growth rate) / (Required return – Growth rate)

Stock price under normal dividend policy = ($2.65*1.05) / (0.12-0.05) = $39.75

Present value of extra ordinary dividend = $25.40/1.12 = $22.68

Stock price = $39.75 + $22.68 = $62.43

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