Next year, Jensen's will pay an annual dividend of $3.32 per share. The company has been reducing its dividends by 7 percent annually. What is this stock worth today if the required return is 15.5 percent?

Question

Quizplus · Accepted Answer

The dividend in the next year = $3.32
The required return = 15.5%
The growth rate of dividends = -7%
Applying the constant growth formula:
P0 = D1 / (r - g)
where,
D1 = next year dividend = $3.32
r = required return = 15.5%
g = growth rate of dividends = -7%
P0 = $3.32 / (15.5% - (-7%))
P0 = $3.32 / 22.5%
P0 = $14.76

Next Year, Jensen's Will Pay an Annual Dividend of $3