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

To calculate the expected share price immediately after the dividend is paid, we need to use the formula: P = D/(r-g), where P is the expected share price, D is the expected dividend, r is the equity cost of capital, and g is the expected growth rate in dividends. Here, g is assumed to be zero because no growth rate is given. 
So, plugging in the values, we get: 
P = 0.85/(0.12 - 0) = 7.08
The expected share price after the dividend is $7.08.
To find the expected share price immediately after the dividend is paid, we need to subtract the dividend from the expected share price: 
Expected share price = $7.08 + $0.85 = $7.93
Therefore, the expected share price immediately after the dividend is paid is $15.39. The correct answer is C.

A Company Has a Current Share Price of $14