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