Bonnie\'s Ice Cream is expecting its ice cream sales to decline due to the incre
ID: 2733982 • Letter: B
Question
Bonnie's Ice Cream is expecting its ice cream sales to decline due to the increased interest in healthy eating. Thus, the company has announced that it will be reducing its annual dividend by 2 percent a year for the next five years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid $2.35 per share. What is this stock worth to you if you require a 9.5 percent rate of return?
(Note that the dividend for the next five years could be flexibly viewed as a growing annuity with negative growth rate.)
Explanation / Answer
Statemnet showing Current Price Particulars Time PVf@9.5% Amount PV Cash inflows (Dividend) 1.00 0.9132 2.3030 2.10 Cash inflows (Dividend) 2.00 0.8340 2.2569 1.88 Cash inflows (Dividend) 3.00 0.7617 2.2118 1.68 Cash inflows (Dividend) 4.00 0.6956 2.1676 1.51 Cash inflows (Dividend) 5.00 0.6352 2.1242 1.35 Cash inflows (Price) = 2/9.5% 5.00 0.6352 21.05 13.37 Current Price of Stock 21.90