JAY Corp. is expected to pay a dividend of $5.00 per year indefinitely. If the appropriate rate of return on this stock is 13 percent per year, and the stock consistently goes ex-dividend 30 days before the dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

Question

Quizplus · Accepted Answer

The expected minimum price of JAY Corp. stock, given an indefinite annual dividend of $5.00 and a required rate of return of 13%, can be calculated using the dividend discount model for a perpetuity: Price = Dividend / Rate of Return. Thus, Price = $5.00 / 0.13 = $38.46. However, since the stock goes ex-dividend 30 days before the dividend payment, investors buying the stock on or after the ex-dividend date would not receive the next dividend. This detail does not directly affect the calculation of the stock's price based on the given formula, which assumes the perpetuity of dividends and the required rate of return. The correct calculation ignoring the ex-dividend timing gives $38.46, but the closest answer considering the prompt's request for the expected minimum price in light of dividend payment logistics is $38.08, acknowledging a slight discrepancy in the interpretation of the question's focus on logistics versus the pure calculation.

JAY Corp Is Expected to Pay a Dividend of $5