Question

A company is expecting its sales to decline and has announced that it will be reducing its annual dividend by 5.75% a year for the next two years. After that, it will maintain a constant dividend of $1.00 a share. Just recently, the company paid a dividend of $2.50 per share. What is this stock worth if you require a 9.75% rate of return? $11.88 $12.19 $12.51 $12.12 $13.13

Answer 1

The answer is c)

A B C D 1 Required rate of return on equ 9.75% 3 Dividend P.V factor Present value 4 0 2.5 1 5 1 2.36 0.911161731 2.147 6 2. 2.22 0.8302157 1.844 7 Terminal Value 8 Div/rate 10.26 0.8302157 8.515 9 12.51

Calculation:-

B D 1 Required rate of return on equity = 3 Present value с 0.0975 P.V factor 1 =C4/(1+$C$1) =C5/(1+$C$1) 4 Dividend 2.5 =B4*(1-5.75%) =B5*(1-5.75%) 0 5 1 =C5*B5 =C6*B6 6 2 7 Terminal Value 8 Div/rate 9 =1/C1 =C6 =C8*B8 =SUM(D5:08)