Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent annually. What is the value of this stock at a discount rate of 15.5 percent?
A) $9.49
B) $10.10
C) $9.82
D) $10.51
E) $11.01

Question

Quizplus · Accepted Answer

The stock is valued using the Gordon Growth Model for a declining dividend, which is P = D1 / (r - g), where D1 is the next dividend, r is the discount rate, and g is the growth rate. Here, D1 = $1.58, r = 15.5% or 0.155, and g = -1.15% or -0.0115. Plugging in these values gives P = 1.58 / (0.155 + 0.0115) = $9.49.

Dee's Made Two Announcements Concerning Its Common Stock Today