The Lighthouse Co.is in a downsizing mode.The company paid a €2.50 annual dividend last year. The company has announced plans to lower the dividend by €.50 a year.Once the dividend Amount becomes zero, the company will cease all dividends permanently.The required rate of teturn is 16%.What is one share of this equity worth?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is €3.76. The dividend is €2.50, and it will decrease by €0.50 each year. The required rate of return is 16%. So, the present value of the dividends is €2.50 / (0.16 - 0.04) = €3.76.