A firm has been losing sales due to technological obsolescence. It projects growth for the future to be −3 percent. Its recent dividend was $2.50. What is the value of this stock when the required return is 7 percent?
A) $28.17
B) $24.25
C) $17.42
D) $15.53

Question

Quizplus · Accepted Answer

The value of the stock can be calculated using the Dividend Discount Model for a company with constant negative growth: $ P_0 = \frac{D_0 \times (1 + g)}{r - g} $, where $ P_0 $ is the price of the stock today, $ D_0 $ is the most recent dividend, $ g $ is the growth rate (in this case, -3% or -0.03), and $ r $ is the required return (7% or 0.07). Plugging in the values: $ P_0 = \frac{2.50 \times (1 - 0.03)}{0.07 + 0.03} = \frac{2.50 \times 0.97}{0.10} = \frac{2.425}{0.10} = 24.25 $.

A Firm Has Been Losing Sales Due to Technological Obsolescence