Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends
ID: 2712649 • Letter: H
Question
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year.
If r = 15% and DIV1 = $3, what is the price of a share?
What price do you forecast for the stock one year from now?
What is the cost of capital on the stock?
Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10% per year.
If r = 15% and DIV1 = $3, what is the price of a share?
What price do you forecast for the stock one year from now?
What is the cost of capital on the stock?
Explanation / Answer
Price of share = D1 / (Ke - g) = 3 / [ 0.15 - (-0.1) ] = $ 12
Forecast Price of share one year from now = 3*0.9 / [ 0.15 - (-0.1) ] = $ 10.8
Cost of capital on stock = Ke = 0.15
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