The financial manager of Options Inc. has just been awarded a bonus of 1,000 preferred shares of the company. The market expects Options preferred stock to pay a dividend of $3.00 next year, and that dividend is expected to continue forever. The manager knows that next year’s dividend is actually going to be only $2.20, but that it will grow at a rate of 3% forever. This fact will be announced to the market shortly. The manager needs to make a down payment on a new house, and wants to sell his 1,000 shares. When should he sell, before the announcement is made or after? Assume the required rate of return on Options Inc. shares is 15%. Assume there are no legal restrictions on the manager’s decision.
The options are:
a) Before announcement because the price per share is $23.00; post-announcement it would be $16.34.
b) Before announcement because the price per share is $20.00; post-announcement it would be $18.33.
c) After announcement because the price per share is $16.34; post-announcement it would be $23.00.
d) After announcement because the price per share is $18.33; post-announcement it would be $20.00.