Question

The Ice Cream Co. is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 5% a year for the next two years. After that, Ice Cream will maintain a constant dividend of $1.25 a share. Last year, the company paid $1.80 per share. What is this stock worth to you if you require a 9% rate of return?

Select one:

a. $11.11

b. $14.23

c. $12.98

d. $10.86

e. $11.64

Answer 1

Price = PV of CFs from it.

Div Calculation:

Year	CF	Formula	Calculation
0	$      1.80	Given	Given
1	$      1.71	D0(1+g)	1.80*0.95
2	$      1.62	D1(1+g)	1.71*0.95
3	$      1.25	Given	Given

P2 = D3 / Ke

D3 = Div after 3 Years

P2 = Price after 2 Yeasr

Ke = required Ret

P2 = D3 / Ke

= $ 1.25 / 9%

= $ 13.89

Year	Particulars	CF	PVF @9%	Disc CF
1	D1	$      1.71	0.9174	$      1.57
2	D2	$      1.62	0.8417	$      1.37
2	P2	$   13.89	0.8417	$   11.69
Price Today	$   14.63