The Kathryn St. J. Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 25% tax on dividends and there is no capital gains tax. The cost of capital for investing in KSJ stock is 13%. (Show Calculations)
a. What is the price of a share of KSJ stock?
b. Assume that management makes a surprise announcement that KSJ will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of KSJ stock now?