The Double Dip Co

question 55

Multiple Choice

The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 5% a year for the next two years.After that,it will maintain a constant dividend of €1 a share.Two weeks ago,the company paid a dividend of €1.40 per share.What is this equity worth if you require a 9% rate of return?

• A)€10.86
• B)€11.11
• C)€11.64
• D)€12.98
• E)€14.23

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Definitions:

Required Rate of Return

The required rate of return is the minimum annual percentage earned by an investment that will entice individuals or companies to put money into a particular security or project.

Preferred Stock

A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock, usually with fixed dividends.

After-Tax Cost of Debt

The interest expense on debt adjusted for taxes, showing the actual cost of debt financing after considering the tax shield.

WACC

Weighted Average Cost of Capital; a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.