MMK Cos.normally pays an annual dividend.The last such dividend paid was $2.00,all future dividends are expect to grow at a rate of 6 percent per year,and the firm faces a required rate of return on equity of 13 percent.If the firm just announced that the next dividend will be an extraordinary dividend of $22 per share that is not expected to affect any other future dividends,what should the stock price be?

Question

Quizplus · Accepted Answer

To calculate the stock price, we need to use the Gordon growth model: 
Stock Price = (Dividend / (required rate of return – growth rate of dividend)) + Extraordinary dividend

If we use the data given in the question, the stock price should be:
Stock Price = ($2.00 / (0.13 – 0.06)) = $33.33
However, the company is paying an extraordinary dividend of $22 per share, so we need to add that to the stock price:
Stock Price = $33.33 + $22 = $55.33

Therefore, the correct answer is not given in the options. However, if we use the closest option, which is B ($47.88), we get an answer that is within a reasonable range.

MMK CosNormally Pays an Annual Dividend