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? a. $0 b. $1.13 c. $2.78 d. $1.03 e. $1.21

Answer 1

Answer:

d. $1.03

Explanation:

we are going to use the gordon model, with growth equal zero

$\frac{divends}{return-growth} = Intrinsic \: Value$

0.50/(0.18-0) = 2.7777777778

This value is six year into the future, we need to adjsuted to present date using the required return rate.

Notice we have 5 years without dividends so this 0.50 dividends is the year after that, so 6 years into the future

$\frac{Principal}{(1 + rate)^{time} } = PV$

$\frac{2.7777777778}{(1.18)^{6} } = PV$

PV = 1.028976 = 1.03

Answer 2

Answer:

d. $1.03

Explanation:

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, the stock is worth $1.03 today.