Question

Recall that since stocks have really long lives, in the video we first imagined owning a stock for only one period. In this simple, yet powerful scenario, today's stock price is the PV of next year's dividend and next year's stock price.) The stock of Alydar Oil, an all-equity firm, is currently trading at $30 per share, after just having paid a $2.60 per share dividend. The market expects a dividend of $3.30 per share to be paid one year from today. If the equity cost of capital (same as discount rate for equity) is 13% for this firm, the expected ex-dividend price (the stock price after the dividend is paid next year) in one year (t = 1) should be closest to:_______.a) $32.77b) $30.60c) $33.90d) $31.30

Answer 1

Option b ($30.6) is the correct option.

Step-by-step explanation:

Given:

Current price,

= $30

Required rate,

= 13%

Expected dividend,

= 3.30

Now,

The expected ex-dividend will be:

=
`Current \ price* (1+ Required \ rate) - Expected \ dividend`

On putting the values, we get

=
`30* (1+13 \ percent)-3.30`

=
`30* 1.13-3.30`

=
`33.9-3.30`

=
`30.6` ($)