Question

Q:Forever 21 is expected to pay an annual dividend of $2.24 per share in one year, which is then expected to grow by 8% per year. The required rate of return is 14%.

A:What is the current stock price?

B:What is the current stock price if the annual dividend of $2.24 has just been paid? (i.e. paid yesterday or earlier today)

C:What is the current stock price if the annual dividend of $2.24 his about to be paid? (i.e. paid tomorrow or later today)

Answer 1

Dividends are the way of rewarding the share holders on the confidence they have kept on the Business, who thus have invested in the company.

Dividends are only made to shareholders those are recorded on the books of the company. A, investor must be on record as a shareholder by on that particular date known as the “record date” in order to receive a dividend.

The company also announces the last date when shares can be purchased to receive the dividend and this is termed as ex-dividend date. This date is generally one business day before the record date.

In stock market, there are numerous factors that affect the stock prices. Supply and demand plays a major role in the rise and fall of stock prices. And equally, there are certain investors who invest exclusively for the dividends and very seasonal. These situations might create artificial demand and thus effect the price of stock.

Payout date is the date after the record date. On the record and payout dates, there are no price adjustments made by the stock exchanges. These dates are mainly for administrative purposes and don't affect the value of the stock based on the dividend payout perspective. Based on this, to answer point B, there will not be any change affect on the stock price on this date, from dividend perpsective.

		$
	Annual Dividend per Share : DPS	2.24
	Required Rate of Return %	14%
	Perpetual Growth %	8%
Point A	Current Stock Price in $	37.33
	(DPS) / (Required Rate of Return%-Perpetual Growth%)
	Current Stock Price in $ (a)	37.33
	DPS (b)	2.24
Point C	Stock Price on Ex-Dividend date (a) - (b)	35.09