Blackwell Ink is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 5 percent annually. What is a share of this stock worth today at a required return of 15 percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected dividend for next year:

Expected Dividend = $0.90 x (1 - 0.05) = $0.855

Then, we can use the Gordon Growth Model to determine the stock price:

Stock Price = (Expected Dividend ÷ (Required Return - Dividend Growth Rate)

Stock Price = ($0.855 ÷ (0.15 - 0.05)

Stock Price = $0.855 ÷ 0.10

Stock Price = $8.55

However, we are looking for the price of one share, so we need to divide this result by the number of outstanding shares:

Share Price = $8.55 ÷ 2 = $4.28

Therefore, the best choice is B.

Blackwell Ink Is Losing Significant Market Share and Thus Its