Question

Gen Corp. is expected to pay a dividend of $2.60 per year indefinitely. The appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 40 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.)

  

Minimum stock price

$

  

What will be the expected maximum 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.)

  

Maximum stock price

$

Answer 1

Dividend to be Paid = 2.60
Rate of Return = 12%
Ex dividend days before dividend payment date = 40
Time period should be added by 1 because the dividend gos to equity holders for (T+1 ) days = 41
Daily interest rate = ( 1 + r)^1/365 - 1 = (1.12)^1/365 - 1 = 0.000311
Minim stock price will include only the value of stock for dicividend for perpetuity
Maximum stock price will include the value of stock for dividends till perpetuity and the distribution of dividend (2.6) factoring 41 days
Minimum Stock Price will be right after the exdividend date =( Dividend/r) / (1+ daily interest rate)⁴¹ = (2.6/.12) / ( 1 + 0.000311)⁴¹ = 21.64

Max Stock Price will before the exdividend = ( Dividend/r) / (1+ daily interest rate)⁴¹ + dividend/(1+r)^41= (2.6/.12) / ( 1 + 0.000311)⁴¹ + 2.6/( 1 + 0.000311)⁴¹ = 24.21

Best of Luck God Bless