Kenzie Cos. is expected to pay a dividend of $3.05 per year indefinitely. The ap

Question

Kenzie Cos. is expected to pay a dividend of $3.05 per year indefinitely. The appropriate rate of return on this stock is 16 percent per year, and the stock consistently goes ex-dividend 40 days before dividend payment date.

What will be the expected minimum price in light of the dividend payment logistics? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

What will be the expected maximum price in light of the dividend payment logistics? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

Kenzie Cos. is expected to pay a dividend of $3.05 per year indefinitely. The appropriate rate of return on this stock is 16 percent per year, and the stock consistently goes ex-dividend 40 days before dividend payment date.

Explanation / Answer

Solution: P0 = $18.75 Minimum price P0 = $21.76 Maximum price Working Notes: Daily interest rate (id) = (1+r)^(1/365) - 1 id = (1+0.16)^(1/365) - 1 =1.0004067128 - 1 = 0.0004067128 The expected minimum price in light of the dividend payment logistics P0= (D1/r) x (1/(1+id)^40) D1 = Expected dividend = $3.05 r= 16%=0.16 id = 0.0004067128 P0= (D1/r) x (1/(1+id)^40) P0=(3.05/0.16)x(1/(1+0.0004067128)^40) P0=18.75495 P0 = $18.75 Minimum price The expected maximum price in light of the dividend payment logistics P0= (D1/(1+id)) + (D1/r) x (1/(1+id)^40) D1 = Expected dividend = $3.05 r= 16%=0.16 id = 0.0004067128 P0= (D1/(1+id)^40) + (D1/r) x (1/(1+id)^40) P0=(3.05/(1+0.0004067128)^40) + (3.05/0.16) x (1/(1+0.0004067128)^40) P0=21.75574488 P0 = $21.76 Maximum price Please feel free to ask if anything about above solution in comment section of the question.

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