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 gain tax. The cost of capital for investing in JRN stock is 12%.
(a) The price of a share of JRN’s stock is closest to:
(1) $20.00 (2) $24.00 (3) $25.00 (4) $18.00
(b) 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:
(1) $20.00 (2) $25.00 (3) $18.00 (4) $24.00