Question

jefferson recently paid an annual dividend of $2 per share. the dividend is expecte to decrease by 1% each year. how much should you pay for this stock today if your required

Answer 1

Answer: $11.65

Step-by-step explanation:

You did not include the required return so I will assume a required return of 16% and you can use that as reference.

Using the Gordon Growth model, the intrinsic value is;

= Next dividend / ( required return - growth rate)

Growth rate = -1%

Next dividend = 2 * ( 1 + growth)

= 2 * (1 - 1%)

= $1.98

Value of stock = 1.98 / (16% + 1%)

= $11.65