The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus, the company has announced that it will be reducing its annual dividend by 5% A year for the next two years.After that, it will maintain a constant dividend of €1 a share.Two weeks ago, the company paid a dividend of €1.40 per share.What is this equity worth if you require a 9% rate of return?

Question

Quizplus · Accepted Answer

The equity value is calculated by discounting the expected dividends at the required rate of return. The dividends for the next two years are €1.33 and €1.26, respectively, followed by a constant dividend of €1. The present value of these dividends, discounted at 9%, results in a value of approximately €11.64.