Question

The Impulse Shopper recently paid an annual dividend of $1.13 per share. The company just announced that it is suspending all dividend payments on its common stock for the next five years. After that, the company expects to pay $.50 a share at the end of each year. At a required return of 18 percent, what is this stock worth today?

Answer 1

Answer:

Stock value today = $1.21

Explanation:

Current Dividend = D${_0}$ = $1.13

After 5 years that is D${_6}$ = $0.50

Since expected growth = 0

Therefore

P${_5}$ = D${_6}$ / Ke = 0.5/18% = $2.77

Its present value will be $\frac{1}{(1 + 0.18){^5}} X 2.77$ = $1.21

Stock value today = $1.21