Boomer Products, Inc. manufactures "no-inhale" cigarettes. As its target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and
Dividends will decline at a rate of 4% annually forever. The ﬁrm just paid a dividend of $2.50; given
A required return of 12%, the stock should today should sell for:

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model for declining dividends): P = D1 / (r - g). Here, D1 = $2.50 * (1 - 0.04) = $2.40, r = 0.12, and g = -0.04. So, P = $2.40 / (0.12 + 0.04) = $15.00.