A firm has been losing sales due to technological obsolescence. It projects growth for the future to be −2 percent. Its recent dividend was $2.00. What is the value of this stock when the required return is 9 percent?
A) $28.00
B) $29.14
C) $17.82
D) $15.52

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the Gordon Growth Model (Dividend Discount Model) for a stock with constant growth: P = D1 / (r - g). Here, D1 = $2.00 * (1 - 0.02) = $1.96, r = 0.09, and g = -0.02. So, P = $1.96 / (0.09 - (-0.02)) = $1.96 / 0.11 = $17.82.

A Firm Has Been Losing Sales Due to Technological Obsolescence