The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero,the company will cease all dividends permanently. The required rate of return is 16%. What is one share of this stock worth?
A) $3.76
B) $4.08
C) $4.87
D) $5.13
E) $5.39

Question

Quizplus · Accepted Answer

The correct answer is A because the stock is worth $3.76. The dividend is $2.50 and the required rate of return is 16%. The dividend will be lowered by $.50 a year until it reaches zero. The stock will then be worth $0.