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MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.05, all future...

MMK Cos. normally pays an annual dividend. The last such dividend paid was $2.05, all future dividends are expected to grow at a rate of 8 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 $24.80 per share that is not expected to affect any other future dividends, what should the stock price be? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

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Answer #1
D0 2.05
For the first two years
g 0.08
D1e (extraordinary dividend) 24.8
D1o (ordinary dividend) (2.05*(1.08))
D1o (ordinary dividend) 2.214
Find the price of the stock in year 0 + present value of extraordinary dividend
According to the dividend growth model.
P0 = D1o/(R-g)
where R is .13
P0 2.214/(.13-.08)
P0 44.28
The value of the stock today = sum of present value of future cash flows.
Using R = .13
Year 1 2 3
Cash flow (extraordinary dividend) 24.8
Cash flow (ordinary dividend) 2.214 2.39112 2.58241
Present value (extraordinary dividend) 21.95
P0 + present value extraordinary dividend 44.28+21.95
P0 + present value extraordinary dividend 66.23
The stock price should be $66.23.
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