Question

JEN Corp. is expected to pay a dividend of $3.25 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 25 days before dividend payment date, what will be the expected minimum price in light of the dividend payment logistics?

Answer 1

Daily interest rate = (1+ rate)^1/365 - 1 = (1+ 12%)^1/365 - 1 = .0003105377 or 0.03105377%

Expected minimum price in light of the dividend payment = (D0 / rate of return) / (1+daily interest rate)ⁿ

D0 = $3.25

Rate of return = 12%

Daily interest rate = 0.03105377%

n = 25 days

Expected minimum price in light of the dividend payment = (3.25 / 12%) / (1+ 0.03105377%) ²⁵

Expected minimum price in light of the dividend payment = 27.083 x 1.00779244 = 27.294042733