Question

J Industries will pay a regular dividend of $2.40 per share for each of the next four years. At the end of the four years, the company will also pay out a liquidating dividend, and the company will cease operations. If the current share price is $50 and the discount rate is 10%, what must the liquidating dividend be? g

Answer 1

The answer is: liquidating dividend should be $62.07.

Step-by-step explanation:

Let denote the amount of liquidating dividend to be X => The present value of liquidating dividend amount is X/1.1^4; given discount rate is 10% and liquidating dividend will be paid in 4 year times.

We have:

Present value of regular dividend stream + Present value of liquidating dividend = Current share price

=> (2.4/10%) x [1 - 1.1^(-4) ] + X/1.1^4 = 50 <=> X/1.1^4 = $42.39 <=> X = 1.1^4 x 42.392 = $62.07.

So, The answer is: liquidating dividend should be $62.07.