Question

1.     The Canning Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5% annually into the foreseeable future. Assume that ks = 11% and D0 = $2.00. What will be the price of the company's stock in three years?

 

Answer 1

Dividend in 3 years is:

$D3 = 2×0.95^3 = 1.715.$

Price in 3 years is:

$P3 = 1.715/(0.11 + 0.05) = 10.72.$