Antiques 'R' Us is a mature manufacturing firm. The company just paid a dividend of $12.00, but management expects to reduce the payout by 5.25 percent per year, indefinitely.

Required:

If you require a return of 10 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e. g., 32.16).)

Question

Kaiden Serrano

Business

11 December, 14:04

Antiques 'R' Us is a mature manufacturing firm. The company just paid a dividend of $12.00, but management expects to reduce the payout by 5.25 percent per year, indefinitely.

Required:

If you require a return of 10 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e. g., 32.16).)

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Answers (1)

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Abigail · Answer 1

Check the explanation

Explanation:

Using the constant growth model which can be applied even if the dividends to be paid are declining by a constant or stable percentage, you just have to make sure that the negative growth is recognized. So, the price of the stock as at today will be calculated like:

P 0 = D 0 (1 + g) / (R - g)

P 0 = $11.40 (1 - 0.0475) / [ (0.08 - (-0.0475) ]

P 0 = $85.16