MMK Cos. normally pays an annual dividend. The last such dividend paid was $1.65
ID: 2781242 • Letter: M
Question
MMK Cos. normally pays an annual dividend. The last such dividend paid was $1.65, 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 $24.40 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.)
Stock price $Explanation / Answer
Market price = D1/(K-g)
where D1= dividend at the end of next year at given growth rate
K= required rate of return
g= growth rate
Market price= 1.65*105% / (12%-5%) = 24.75
This calculation represents present value of all future dividends from investment in stock, in the given case dividend for next year is 24.4 where as in the formula it is= 1.65*1.05= 1.7325
The reminder 24.4-1.7325= 22.6675 is not taken care which needs to be discounted at 12% and added to market price to get actual market price today= 22.6675*1/1.12 +24.75= 44.9888 will be the market price of the stock today
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