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. Last year,
The company paid $1.40 per share. What is this stock worth to you if you require a 9% rate of return?

Question

Quizplus · Accepted Answer

The stock's worth is calculated by discounting the expected future dividends. The dividends for the next two years are $1.33 and $1.26, respectively, due to the 5% annual reduction. After that, the dividend is constant at $1. Using the dividend discount model and a 9% required rate of return, the present value of these dividends is approximately $11.64.