Question 24 Effects of Dividends on Stock Prices: Wren Corp. is expected to pay a...
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Question 24 Effects of Dividends on Stock Prices: Wren Corp. is expected to pay a dividend of $3.00 per year indefinitely. If the appropriate rate of return on this stock is 12 percent per year, and the stock consistently goes ex-dividend 35 days before dividend payment date, what will be the expected minimum and maximum prices surrounding the dividend payment?
First, determine the daily interest rate, use the formula:
iDaily= + -1.
Then the maximum stock price, will occur right before the stock goes ex-dividend:
Pbefore = [Dividend / (1 + iDaily) (# days from ex-dividend thru payment) ] + [(Dividend / i) X (1 / (1 + iDaily) (# days from ex-dividend thru payment) ]
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