Question: In 2006 and 2007, Kenneth Cole Productions (KCP) paid annual dividends of $0.68. In 2008, KCP paid an annual dividend of $0.38, and then paid no further dividends through 2012. Suppose KCP was acquired at the end of 2012 for $15.04 per share.
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 5.1%.)
The present value of the cash flows is $ . (Round to the nearest cent.)
b. Does your answer to (a) imply that the market for KCP stock was inefficient in 2006?