Sallie Mae Clothing is in the process of selling its periphe

Sallie Mae Clothing is in the process of selling its peripheral businesses and returning to a pure clothing store. In conjunction with this reorganization, the dividend will be decreased by 20 percent in each of the next 2 years. After that, the dividend will resume its historical pattern of 3 percent annual increases. The required return on this stock is 10 percent and the last dividend paid was $3 a share. What is one share of this stock worth today?

SHOW WORK

Solution

D1=(3*(1-0.2)=$2.4

D2=(2.4*(1-0.2)=$1.92

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(1.92*1.03)/(0.1-0.03)

=$28.25142857

Hence current value of one shae=Future dividends*Present value of discounting factor(10%,time period)

=2.4/1.1+1.92/1.1^2+$28.25142857/1.1^2

=27.12(Approx).