Question

Blackwell Ink 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 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?

Answer 1

Answer:

The price of this stock today is $4.275

Explanation:

The constant growth model of the DDM approach will be used to calculate the price of this stock today. However, as the dividends are falling by a consatnt percentage every year, the growth rate taken will be negative i.e. -5%.

The formula for the price of a stock using this model is,

P0 = D0 * (1+g) / r - g

Thus,

P0 = 0.9 * (1 - 0.05)  /  0.15 +0.05

P0 = $4.275