Killnum Corp. announces that the dividend for the next year will be $2.50 per sh

Question

Killnum Corp. announces that the dividend for the next year will be $2.50 per share rather than the originally expected $1.50 per share. From then on, it is expected that dividends will resume their historical constant growth rate of 5% per year. What would you expect to happen to the price of the stock? Ignore any tax effects. a. The price will likely double. b. The price will likely rise by less than 100%. c. The price will likely rise by exactly 50%. d. The price will remain unchanged. e. The price will likely rise by the present value of $1.

Explanation / Answer

price = D1/r-g

so price of share is directly proportional to dividend per share

=>

P1/P2 = D1/D2

=>

P1/P2 = 1.5/2.5

=>

P2 = 1.67 * P1

=>

percentage change in priece = 67%

so , the price will likely raise by less than100%

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