ABC Corp.is expected to pay a dividend of $5.00 per year indefinitely.If the appropriate rate of return on this stock is 5 percent per year,and the stock consistently goes ex-dividend 45 days before dividend payment date,what will be the expected maximum price in light of the dividend payment logistics?

Question

Quizplus · Accepted Answer

We can use the formula to calculate the maximum price of a dividend-paying stock, which is:

Maximum Price = Dividend / (Rate of Return - Dividend Yield)

Dividend yield can be calculated by dividing the annual dividend by the maximum price and adding the growth rate (which is zero in this case since the stock's dividends are expected to remain constant).

Dividend Yield = Dividend / Maximum Price + Growth Rate

Dividend Yield = $5 / Maximum Price + 0

We know that the rate of return is 5%, so we can plug in the values:

Maximum Price = $5 / (0.05 - $5 / Maximum Price)

Simplifying this equation, we get:

Maximum Price = $100

Therefore, the expected maximum price of the stock is $100 per share. The closest option is C, $103.77, which is higher than $100 due to the timing of the ex-dividend date 45 days before the payment date.

ABC CorpIs Expected to Pay a Dividend of $5