PQR Corp.is expected to pay a dividend of $1.50 per year indefinitely.If the appropriate rate of return on this stock is 8 percent per year,and the stock consistently goes ex-dividend 25 days before dividend payment date,what will be the expected minimum price in light of the dividend payment logistics?

Question

Quizplus · Accepted Answer

The ex-dividend date is 25 days before the dividend payment date. If we assume a 365-day year, then each day is equal to 1/365 = 0.00274. 
So, the ex-dividend date is 25 * 0.00274 = 0.0685 years before the dividend payment date. 
The present value of the dividend, given an appropriate rate of return of 8%, is:
$1.50 / 0.08 = $18.75 
The expected minimum price would be the present value of the dividend plus any expected appreciation in the stock price: 
Minimum expected price = $18.75 
Therefore, the best choice is B.

PQR CorpIs Expected to Pay a Dividend of $1