Question

Declining Corporation just paid a dividend of $1.23 and has an expected growth rate of -5% for the foreseeable future, if the discount rate is 7% what is the appropriate stock price today?

		$   9.74
		$ 10.25
		$   9.67
		$ 11.43

(I need the steps by hand/calculator for class, not steps with excel)

Answer 1

Solution:
	Answer is 1st option $9.74
Working Notes:
	we get price using constant growth model
	P0= D0 x (1+g) /( r - g)
	Here r = Discount rate= 7%
	g= constant growth rate = -5%
	P0= D0 x (1+g) /( r - g)
	= $1.23 x (1-0.05)/( .07 -(-0.05))
	=1.1685/0.12
	=$9.7375
	=$9.74
Notes:	Expected growth rate -ve sign shows its constant declining growth rate.
Please feel free to ask if anything about above solution in comment section of the question.