Question

17) Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent?

Please show work

Answer 1

- Annual Dividend paid (D0) = $3

Reduction in growth rate for next 2 years = 10%

thereafter, Dividend will be constant(D3) = $2

Required return(ke) = 13.7 percent

Calculating the Market value:-

Price = 2.3747 + 1.8797 + 11.2924

Price = $ 15.55

So, the Market value of Stock is $ 15.55

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