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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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  1. 24 June, 14:51
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    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
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