Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.15, but management expects to reduce the payout by 5 percent per year, indefinitely. If you require a return of 15 percent on this stock, what will you pay for a share today?

Answer:The answer is $16.66

Explanation:

Using the formula

Present worth = X / (1+R/100) ∧n

X = $9.15, R = 5 % (5/100) = 0.05, n = 1

9.15 / (1 + 0.05) ∧1

= 9.15 / (1.05) ∧1

9.15/1.05

= 8.71

Requirement of 15% on the stock

X = 9.15, R = 15% (15/100) = 0.15, n=1

X / (1+R/100) ∧n

9.15 / (1 + 0.15) ∧1

= 9.15 / (1.15) ∧1

9.15/1.15

= 7.95

To arrive at the value of the share today, add the present worth together

8.71 + 7.95

= 16.66

The price to pay for the share today is $16.66