Question

uestion 4 ue to the advent and proliferation of life extension technology, the funeral services ndustry has been seeing a steady year-to-year decline. Press F is a publicly-listed, w-cost chain of funeral homes that specialises in helping bereaved families pay espects. The firm has just(paid its annual dividend of $7.75 per share. Shares of Press F currently trade on the market for a price of $39.76 each, with investors equiring a return of 15.5% per annum. m. Ti = 15.57. Based on the above information, which of the following is closest to the constant nnual rate of decline that investors anticipate in the dividends of Press F? g= ? TXE a. 4.96% b. 3.34% c. 3.47% d. 3.99% e. 3.04% وهو

Answer 1

Current Stock Price = P0 = $ 39.76, Current Dividend = D0 = $ 7.75 and let the perpetual constant rate of decline in dividends be g

Required Return = r = 15.5 %

D1 = D0 x (1-g)

As per the Gordon - Growth Model: P0 = D1/(r-g)

g = r - (D1/P0)

g = r - [D0 x (1-g)] / P0

g = 0.155 - [7.75/39.76] x (1-g)

g = 0.155 - 0.19492 + 0.19492g

0.80508g = - 0.03992

g = - 0.03992 / 0.80508 = - 0.04958 or - 4.958 % ~ - 4.96 % (a negative sign indicates a decline in the dividend)

Hence, the correct option is (a)