Question

Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent? Group of answer choices

Answer 1

Answer:

The answer of the following question is $ 25.711

Explanation:

Dividend (D0)= $ 3 per share

D1 = $ 3 * (1 - 0.10) = 2.7 per share

D2 = $ 2.7 * (1 - 0.10) = 2.43 per share

P0 = $ 2 / 0.137 = $ 14.598

Market value of this stock = D1 * PVF 1 + D2 * PVF2 + P0 * PVF2

= 2.7 * 1/(1+0.137) + 2.43 * 1/(1+ 0.137)^2 + 14.598 * 1/(1+ 0.137)^2

= 3.699 + 3.141 + 18.871

= $ 25.711