Question

rangel corporation paid an annual dividend of $2.50 last year. the company has announced plans to lower the dividend by $.50 per year. once the dividend amount becomes zero, the company will cease all dividends permanently. the required rate of return is 14.5 percent. what is one share of this stock worth?

Answer 1

One share of Rangel Corporation stock is worth $17.86.

Step-by-step explanation:

To determine the value of one share of Rangel Corporation stock, we can use the dividend discount model (DDM). The formula for DDM is: Value per share = Dividend per share / (Required rate of return - Dividend growth rate). In this case, the dividend per share is $2.50 and the dividend growth rate is $0.50. The required rate of return is given as 14.5 percent.

Using these values, we can substitute them into the formula: Value per share = $2.50 / (0.145 - 0.005) = $2.50 / 0.14 = $17.86

Therefore, one share of Rangel Corporation stock is worth $17.86.

Answer 2

The value of a Rangel Corporation share is calculated using the Dividend Discount Model by taking the present value of each future dividend, given the dividends are decreased annually by $0.50 and the required rate of return is 14.5%. The present value of each decreasing dividend is summed to determine the stock's value.

Step-by-step explanation:

The valuation of a stock based on its dividend payments is done using the Dividend Discount Model (DDM). In this case, Rangel Corporation is lowering its dividend by $0.50 yearly until it ceases dividends altogether. We will use the sum of the present value of all future dividends to determine the value of a share. We know that the dividends are decreasing annually by $0.50 from an initial dividend of $2.50 and will continue for a finite number of years until they reach $0. Given the required rate of return of 14.5%, we can calculate the present value of each year's dividend and sum them up to find the value of one share.

To calculate the value of the stock, we will find the present value (PV) of each dividend payment. The first dividend is $2.50, the second is $2.00 ($2.50-$0.50), and so on, with the last dividend being $0.50. We discount each dividend by the required rate of return of 14.5% raised to the power of the year in which the dividend is received.

Calculation Details:

1. Year 1 Dividend:
   `$2.50 / 1 + 0.145)^(1)`
2. Year 2 Dividend:
   `$2.00 / (1 + 0.145)^(2)`
3. Year 3 Dividend:
   `$1.50 /(1 + 0.145)^(3)`
4. Year 4 Dividend:
   `$1.00 / (1 + 0.145)^(4)`
5. Year 5 Dividend:
   `$0.50 /(1 + 0.145)^(5)`

Adding up all these present values gives us the value of one share.