Question
Assume that it is uncertain, at the time that Middling Growth makes its earnings setback announcement, which scenario for future dividends, the one in the
Assume that it is uncertain, at the time that Middling Growth makes its earnings setback announcement, which scenario for future dividends, the one in the first Middling Growth problem above or the one in the second problem above, will turn out to be correct. You estimate that there is an 80% chance that the earnings setback will be short-term (the scenario in the first problem) and a 20% chance that the problem will be longer-term (the scenario in the second problem).
a. What are Middling Growth's expected future dividends, taking both possibilities into account, in each future year?
Year | Expected Dividend after Earnings Setback |
1 | $5.00 |
2 |
|
3 |
|
4 and thereafter |
|
b. What is Middling Growth's expected stock price, immediately after the announcement of the earnings setback?
c. What percentage decline would be expected in Middling Growth's stock price, compared to the price that Middling Growth shares sold for before the announcement?
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