Question

Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients. In conjunction with this reorganization, the dividend will be decreased by 10 percent for the next 3 years. After that, the dividend will resume increasing at an annual rate of 5 percent. The required return on this stock is 14 percent and the last dividend paid was $2.40 a share. What is one share of this stock worth today?

Answer 1

$18.35

Step-by-step explanation:

P0 = D1/(1+r)^1 + D2/(1+r)^2 + D3/(1+r)^3 + P3/(1+r)^3

D1 = $2.40 * 0.90 = $2.16

D2 = $2.16 * 0.90 = $1.944

D3 = $1.944 * 0.90 = $1.7496

P3 = D3*(1+g)/(r-g) = $1.7496*(1+0.05)/(0.14-0.05) = $20.412

P0 = D1/(1+r)^1 + D2/(1+r)^2 + D3/(1+r)^3 + P3/(1+r)^3

P0 = [$2.16/(1+0.14) + $1.944(1+0.14)^2 + $1.7496/(1+0.14)^3 + $20.412/(1+0.14)^3]

P0 = $18.35

Therefore, the worth of the stock today is $18.35.