The HNH Corporation will pay a constant dividend of $2 per share, per year, in perpetuity. Assume all investors pay a 25% tax on dividends and that there is no capital gains tax. Suppose the other investments with equivalent risk to HNH stock offer an after-tax return of 14%.
a. What is the price of a share of HNH stock?
b. Assume that management makes a surprise announcement that HNH will no longer pay dividends but will use the cash to repurchase stock instead. What is the price of a share of HNH stock now?