Question

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 $0.90 a share but all future dividends will be decreased by 10 percent annually. What is a share of this stock worth today at a required return of 15 percent?

Answer 1

Answer:

$3.24

Explanation:

Data provided in the question:

Last annual dividend, D0 = $0.90

Growth rate, g = -10% = - 0.10        (negative sign means decrease)

Required return, r = 15% = 0.15

Now,

Future dividend, D1 = D0 × (1 + r)

= $0.9 × (1 + (-0.10) )

= $0.81

Current worth of the stock = $0.81 ÷ ( 0.15 - (-0.10) )

= $0.81 ÷ 0.25

= $3.24