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.

Question

Quizplus · Accepted Answer

The increase in the dividend from $1.50 to $2.50 will likely lead to an increase in the stock price, but not necessarily by 100%. The price will rise by the present value of the increased dividend and the effect of the constant growth rate.