A company has a current share price of $14.50 and is expected to pay a $0.85 dividend in one year. If the company's equity cost of capital is 12%, what price would its shares be expected to sell for immediately after it pays the dividend?

Question

Quizplus · Accepted Answer

The correct answer is B. The ex-dividend price is calculated as the current share price minus the dividend per share. In this case, the ex-dividend price would be $14.50 - $0.85 = $13.65. However, the stock price is expected to increase by the amount of the dividend after it is paid, so the expected share price immediately after the dividend is paid would be $13.65 + $0.85 = $15.39.

A Company Has a Current Share Price of $14