Question

Gen Corp. is expected to pay a dividend of $3.10 per year
indefinitely. The appropriate rate of return on this stock is 10
percent per year, and the stock consistently goes ex-dividend 30
days before dividend payment date.

What will be the expected minimum price in light of the dividend
payment logistics? **(Use 365 days a year. Do not round
intermediate calculations and round your final answer to 2 decimal
places.)**

What will be the expected maximum price in light of the dividend payment logistics?

Answer #1

1. Minimum Stock Price = P0 = (Annual Dividend / Rate of return ) * ( 1 / (1.10^(1/365))^30)

Minimum Stock Price = P0 = ($3.10/.10)x (1/[(1 + 0.000261)30thpower]

Minimum Stock Price = P0 = ($31)x (1/[(1 + 0.000261)30thpower]

**Minimum Stock Price = P0 = $30.76**

2. Maximum Stock Price = P0 = (Annual Dividend / (1.10^(1/365))^30) ) + (Annual Dividend / Rate of return ) * ( 1 / (1.10^(1/365))^30)

Maximum Stock Price = P0 = $3.10 / (1/[(1 + 0.000261)30thpower] + ($3.10/.10)x (1/[(1 + 0.000261)30thpower]

Maximum Stock Price = P0 = $3.12 + ($31)x (1/[(1 + 0.000261)30thpower]

**Maximum Stock Price = P0 = $33.88**

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