Question

The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. The required rate of return is 16%. What is one share of this stock worth?

Answer 1

Answer:

$3.7557

Explanation:

The computation of one share of this stock worth is shown below:-

Years    Dividend     Present value         Present value

                                 factor at 16%    

0            $2.50

1             $2.00         0.8621                             $1.7241

2            $1.50           0.7432                            $ 1.1147

3             $1.00         0.6407                            $0.6407

4             $0.50       0.5523                             $0.2761

                                  Total                              $3.7557

Present value factor at 16% = (1 ÷ (1 + discount rate))^years