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

Ans:

Stock price = D1 (R-g) = Do * (1+g) / (R-g)

= $2.65 * 1.05 / (.12 -.05)

= 2.7825 / .07

= 39.75

Ans:

Stock price = D1 (R-g) = Do * (1+g) / (R-g)

= $2.65 * 1.05 / (.12 -.05)

= 2.7825 / .07

= 39.75

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