TJ Corp.is expected to pay a dividend of $3.00 per year indefinitely.If the appropriate rate of return on this stock is 10 percent per year,and the stock consistently goes ex-dividend 45 days before dividend payment date,what will be the expected minimum price in light of the dividend payment logistics?

Question

Quizplus · Accepted Answer

To calculate the expected minimum price of the stock in light of the dividend payment logistics, we need to use the ex-dividend formula:

Expected minimum price = (Dividend payment - Dividend payment x appropriate rate of return) / (1 + appropriate rate of return)
Expected minimum price = ($3.00 - $3.00 x 0.10) / (1 + 0.10)
Expected minimum price = $2.70 / 1.10
Expected minimum price = $24.55

However, since the stock consistently goes ex-dividend 45 days before the dividend payment date, we need to account for this by adding the present value of the next dividend payment to the expected minimum price:

Present value of next dividend payment = $3.00 / (1 + 0.10)^(45/365)
Present value of next dividend payment = $2.89

Expected minimum price = $24.55 + $2.89
Expected minimum price = $27.44

Therefore, the best choice is B, which is closest to the calculated expected minimum price of $27.44.

TJ CorpIs Expected to Pay a Dividend of $3