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ABC Corporation is expecting their sales to decline
ABC Corporation is expecting their sales to decline. Thus, the company has announced that they will be reducing their annual dividend by 4% a year for the next four years. After that, they will maintain a constant dividend of $1 a share. Last year, the company paid $1.80 per share. What is this stock worth to you if you require a 12% rate of return?
Expert Solution
The current value of the stock is computed as shown below:
= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + Dividend in year 4/ (1 + required rate of return)4 + 1 / (1 + required rate of return)4[ Dividend after year 4 / required rate of return ]
= ($ 1.80 x 0.96) / 1.12 + ($ 1.80 x 0.96 x 0.96) / 1.122 + ($ 1.80 x 0.96 x 0.96 x 0.96) / 1.123 + ($ 1.80 x 0.96 x 0.96 x 0.96 x 0.96) / 1.124 + 1 / 1.124 x [ ($ 1 / 0.12) ]
= $ 1.728 / 1.12 + $ 1.65888 / 1.122 + $ 1.5925248 / 1.123 + $ 1.528823808 / 1.124 + $ 8.33333333 / 1.124
= $ 1.728 / 1.12 + $ 1.65888 / 1.122 + $ 1.5925248 / 1.123 + $ 9.862157141 / 1.124
= $ 10.27
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