Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

Question

Business

Ingrid Gibson

24 June, 11:13

Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

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Answers (1)

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Quintin Frye · Answer 1

The correct answer is $7.33.

Explanation:

According to the scenario, the computation of the given data are as follows:

Rate of return = 18%

Growth rate = - 25%

Annual dividend = $4.20

So, we can calculate the current price by using following formula:

Current price = Dividend expected : (Rate of return - Growth rate)

By putting the value, we get

Current price = $4.20 (1 - 25%) : 18% - (-25%)

= $3.15 : 43%

= $7.33