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kodGreya [7K]
3 years ago
15

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend.

The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent
Business
1 answer:
Naya [18.7K]3 years ago
4 0

Answer:

$3.90

Explanation:

using the discount model we can calculate the stock price:

stock price = [dividend x (1 - g)] / (RRR + g) ⇒ since the growth rate is negative, we need to change additions for subtractions and vice versa.

stock price = [$0.86 x (1 - 3.5%)] / (17.8% + 3.5%) = ($0.86 x 0.965) / 0.213 = $0.8299 / 0.213 = $3.90

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