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Negative Growth: Value of a share

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10 percent per year.
Please answer a. b. c. d. and explain/show how you determined the answers.

a. If r = 15 percent and DIV1 = $3, what is the value of a share?

b. What price do you forecast for the stock next year?

c. What is the expected rate of return on the stock?

d. Can you distinguish between "bad stocks" and "bad companies"? Does the fact that the industry is declining mean that the stock is a bad buy?

Solution Preview

Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends are all shrinking at a rate of 10 percent per year.
Please answer a. b. c. d. and explain/show how you determined the answers.

a. If r = 15 percent and DIV1 = $3, what is the value of a share?
Dividend discount model : Po = Div1/(r-g)

Where Po = Price of the share ...

Solution Summary

The solution calculates value of a share for a company experiencing negative growth. It also distinguishes between "bad stocks" and "bad companies".

$2.19