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1. You own shares of Crane DVD Company and are interested in selling them. With so...

1. You own shares of Crane DVD Company and are interested in selling them. With so many people downloading music these days, sales, profits, and dividends at Crane have been declining 6 percent per year. The firm just paid a dividend of $1.90 per share. The required rate of return for a stock this risky is 14 percent. If dividends are expected to decline at 6 percent per year, what is a share of the stock worth today? (Round answer to 2 decimal places, e.g. 15.20.)

Worth of share of stock $

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Answer #1

The dividend paid last year is = $1.9

the growth rate is = -6%

The required rate of return is = 14%

According to the gordon Growth Model,

D1 = $1.9 ( 1- 0.06)

= $1.786

Po = D1 / Re - g

= $1.786/ 0.14 - (-0.06)

=$1.786/0.20

=$8.93 (rounded off to two decimal places)

Therefore, the value of shares today is $8.93.

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