Horse and Buggy Inc. is in a declining industry. Sales, earnings, and dividends
are all shrinking at a rate of 10% per year.
a. If r = 15% and DIV 1 = $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?
Shrinking rate ...........10.00%
Required rate of return....... 15.00%
Dividend in 1st year.........$3.00