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. Two weeks ago,the company paid a dividend of $1.40 per share. What is this stock worth if you require a 9% rate of return?
A) $10.86
B) $11.11
C) $11.64
D) $12.98
E) $14.23

Question

Quizplus · Accepted Answer

The stock is worth $11.64. To find this, calculate the present value of the expected dividends. The dividends for the next two years are $1.33 and $1.26 (5% reduction each year from $1.40). After two years, the dividend is constant at $1. The present value of these dividends, discounted at 9%, gives the stock's worth.