Farm Equipment,Inc.announced this morning that its next annual dividend will be decreased to $1.80 a share and that all future dividends will be decreased by an additional 1.5 percent annually.What is the current value per share of this stock if the required return is 16.5 percent?

Question

Quizplus · Accepted Answer

Using the constant growth model:

P0 = D1 / (r - g)

where: 
D1 = next year's dividend = $1.80 
r = required return = 16.5% or 0.165 
g = growth rate = -1.5% or -0.015 (since the dividend is decreasing)

Plugging in the values:

P0 = $1.80 / (0.165 - (-0.015)) 
P0 = $1.80 / 0.18 
P0 = $10

Therefore, the current value per share of this stock is $10. Choice B is the correct answer.