Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends

Question

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 8% per year. a. If r = 12% and DIV1 = $5, what is the value of a share? (Do not round intermediate calculations.) Value of a share $ b. What price do you forecast for the stock next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Stock price $ c. What is the expected rate of return on the stock? (Do not round intermediate calculations.) Expected rate of return %

Explanation / Answer

a. value of a share = 5/(12%+8%) =$25 b. value of stock next year = 5*(1-8%)/(12%+8%) =23 c. expected rate of return on the stock = (23 + 5 - 25)/25 =12.00%

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