Question

JJ Industries will pay a regular dividend of $.70 per share for each of the next four years. At the end of four years, the company will also pay out a liquidating dividend. If the discount rate is 10 percent, and the current share price is $73, what must the liquidating dividend be? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Liquidating Dividend=?

Answer 1

As per dividend discount model, current stock price will be the sum of present value of all future dividends.

here,

Dividend from Y1 to Y4 = $0.70

liquidating dividend = D

Price per share = $73

rate r = 10%

So Price per share = 0.7/(1+10%) + 0.7/(1+10%)^2 + 0.7/(1+10%)^3 + 0.7/(1+10%)^4 + D/(1+10%)^4

73 = 0.64 + 0.58 + 0.53 + 0.48 + D/1.4641

D/1.4641 = 70.78

D = $103. 63