Use the cash to repurchase stock instead

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Reference no: EM132006430

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?

Reference no: EM132006430

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