Last week, Railway Tours paid its annual dividend of $1.20 per share. The company has been reducing the dividends by 10 percent each year. What is the value of this stock at a discount rate of 13 percent

Answer: $4.70

Explanation:

The Gordon Growth Model allows for the calculation of stock value using the predicted growth rate of dividends and the discount rate.

The formula is;

Value of stock = Next Dividend / (Discount rate - growth rate)

Next Dividend = Current dividend * growth rate

= 1.2 * (1 - 0.1)

= $1.08

Value of Stock = 1.08 / (13% - (-10%))

= 1.08 / (13% + 10%)

= 1.08 / 23%

= $4.70