Question

Sweatshirts Ltd. is downsizing. The company paid a $3.80 annual dividend last year and has announced plans to lower the dividend by 15 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 given the company's situation. What are your shares in this firm worth today on a per share basis?

Group of answer choices

$5.54
$9.79
$10.64
$220
$9.39

Answer 1

$9.79

Step-by-step explanation:

let:

Po is the price of stock

Div1 is the estimated dividends for next period

r is the required rate of return

g is the growth rate

Div1 = $3.80 * (1 - 15%)

= $3.23

Po = Div1/(r - g)

= $3.23/(0.18 - (-0.15))

= $9.79

Therefore, your shares in this firm worth today on a per share basis is $9.79