Question

Great Lakes Steel Supply is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $1.30 per share but all future dividends will be decreased by 2.75 percent annually. What is a share of this stock worth today at a required return of 15.5 percent

Answer 1

The share of this stock worth today at a required return of 15.5 percent is $6.93.

Using this formula

P0={Annual Dividend×[1+(- Future Dividend %)]}/[Required return %-(-Future Dividend %)]}

Let plug in the formula

P0 = {$1.30 × [1 + (−.0275)]} / [.155 − (−.0275)]

P0=($1.30×.9725)/0.1825

P0=1.26425/0.1825

P0=$6.927

P0= $6.93 (Approximately)

Inconclusion the share of this stock worth today at a required return of 15.5 percent is $6.93.

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