Sweatshirts Unlimited is downsizing. The company paid a $2.80 annual dividend last year. The company has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will cease all dividends and go out of business. You have a required rate of return of 15.5 percent on this particular stock given the company's situation. 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 $5.19. The dividend is $2.80, and it will decrease by 25% each year. The required rate of return is 15.5%. So, the present value of the dividends is $2.80 / (0.155 - 0.25) = $5.19.

Sweatshirts Unlimited Is Downsizing