Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

Question

Quizplus · Accepted Answer

The correct answer is A because the present value of the dividends is $7.33. The dividend is $4.20, the growth rate is -25%, and the required rate of return is 18%.