Farm Equipment announced this morning that its next annual dividend will be decreased to $1.67 a share and that all future dividends will be decreased by an additional 1.3 percent annually.What is the current value per share if the required return is 15.7 percent?

Question

Quizplus · Accepted Answer

The current value per share can be calculated using the Gordon Growth Model (Dividend Discount Model for a decreasing dividend), which is P = D1 / (r - g). Here, D1 = $1.67, r = 15.7% or 0.157, and g = -1.3% or -0.013. Plugging in these values gives P = $1.67 / (0.157 + 0.013) = $9.82.

Farm Equipment Announced This Morning That Its Next Annual Dividend