The JRN Corporation will pay a constant dividend of $3 per share, per year, in perpetuity. Assume that all investors pay a 20% tax on dividends and that there is no capital gains tax. The cost of capital for investing in JRN stock is 12%. Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead. The price of a share of JRN's stock is now closest to:
Added by Elizabeth G.
Step 1
The constant dividend is $3 per share. Since investors pay a 20% tax on dividends, the after-tax dividend is calculated as follows: After-tax dividend = Dividend × (1 - Tax Rate) After-tax dividend = $3 × (1 - 0.20) = $3 × 0.80 = $2.40 Show more…
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