Question: Bungi Jump Inc. is in a declining industry. Earnings and dividends per share are falling at a rate of 10 percent per year.

A. If the discount rate (r) is 15 percent and DIV₁ = $3 , what is the market price 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? Show and explain.

D. At a dinner party you overhear Dr. Alec Smart say “I would never buy stock in a declining industry because such stock is always a bad buy.” In light of your answers above, please discuss briefly.