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 5% per year.

If r = 20% and DIV1 = $6, what is the price of a share? (Do not round intermediate calculations.)

What price do you forecast for the stock one year from now? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

What is the cost of capital on the stock? (Do not round intermediate calculations.)

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 5% per year.

Explanation / Answer

a. value of a share = 6/(20%+5%) =$24

b. value of stock next year = 6*(1-5%)/(20%+5%) =22.80

c. cost of capial on the stock = (22.8 + 6 - 24)/24 =20.00%

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