LMNOP Cos Normally Pays an Annual Dividend

question 61

Multiple Choice

LMNOP Cos. normally pays an annual dividend. The last such dividend paid was $5.00, all future dividends are expected to grow at a rate of 5 percent per year, and the firm faces a required rate of return on equity of 15 percent. If the firm just announced that the next dividend will be an extraordinary dividend of $10 per share that is not expected to affect any other future dividends, what should the stock price be?

• A) $52.50
• B) $56.63
• C) $100.00
• D) $150.00

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Definitions:

Discount

The reduction from the full amount or value of something, especially the price of a financial instrument or merchandise.

Coupon Rate

The annual interest rate paid by a bond as a percentage of the face value, indicating the income investors can expect to receive.

Interest Rates

The percentage of a sum of money charged for its use, often expressed as an annual percentage.

Premium

The amount paid for an insurance policy or an extra charge for an enhanced or optional service over and above the basic.