Corporate Finance
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 9, Problem 9P

In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.72. In 2008, KCP paid an annual dividend of $0.36, and then paid no further dividends through 2012. KCP was acquired at the end of 2012 for $15.25 per share.

  1. a. What would an investor with perfect foresight of the above been willing to pay for KCP at the start of 2006? (Note: Because an investor with perfect foresight bears no risk, use a risk-free equity cost of capital of 5%.)
  2. b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006?
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