Question

The Lighthouse Co. is in a downsizing mode. The company paid a $2.50 annual dividend last year. The company has announced plans to lower the dividend by $.50 a year. Once the dividend amount becomes zero, the company will cease all dividends permanently. The required rate of return is 16%. What is one share of this stock worth?

Answer 1

$3.7557

Step-by-step explanation:

The computation of one share of this stock worth is shown below:-

Years Dividend Present value Present value

factor at 16%

0 $2.50

1 $2.00 0.8621 $1.7241

2 $1.50 0.7432 $ 1.1147

3 $1.00 0.6407 $0.6407

4 $0.50 0.5523 $0.2761

Total $3.7557

Present value factor at 16% = (1 ÷ (1 + discount rate))^years