Question

The GOOG Co. is in a downsizing mode. The company will pay the following dividends and...

The GOOG Co. is in a downsizing mode. The company will pay the following dividends and will then go out of business after 2018.

2014 (D1)

2015

2016

2017

2018

$2.00

$1.50

$1.00

$0.50

$0.00

The required rate of return is 16%. What is one share of this stock worth?

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Answer #1

The share price is computed as shown below:

= Dividend in 2014 / (1 + required rate of return)1 + Dividend in 2015 / (1 + required rate of return)2 + Dividend in 2016 / (1 + required rate of return)3 + Dividend in 2017 / (1 + required rate of return)4 + Dividend in 2018 / (1 + required rate of return)5

= $ 2 / 1.16 + $ 1.50 / 1.162 + $ 1 / 1.163 + $ 0.50 / 1.164 + $ 0 / 1.165

= $ 3.76 Approximately

Feel free to ask in case of any query relating to this question

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