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Dee’s made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.94 a share. Secondly, all dividends after that will decrease by 1.25 percent annually. What is the value of this stock at a discount rate of 14.5 percent?

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jepessoa

Answer:

The answer is: $12.32

Explanation:

Dee's stock can be considered a perpetuity with a negative growth rate. So we can use the following formula to calculate the value of Dee's stock:

price of Dee's stock = dividend / (discount rate - growth rate)

where:

  • dividend = $1.94
  • discount rate = 0.145
  • growth rate = -0.0125

price of Dee's stock = $1.94 / [0.145 - (-0.0125)] = $1.94 / (0.145 + 0.0125) =

$1.94 / 0.1575 = $12.32

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