Question

Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $11.00, but management expects to reduce the payout by 4.75 percent per year, indefinitely. If you require a return of 10 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

the intrinsic value of the share is 71.03 dollars

That is the amount a rational investor would purchase the share.

Step-by-step explanation:

there is a negative grow on the dividends thus, lowering the stock price according to the gordon model

`(divends_1)/(return-growth) = Intrinsic \: Value`

d0 =11

d1 = d0 (1 + g)

being g = 4.75% negative:

11 (1 - 0.0475) = 10,4775‬

Then, we calcualate the ntrinsic value of the share:

`(10.4775)/(0.10 - (-0.0475)) = Intrinsic \: Value`

`(10.4775)/(0.1475)) = Intrinsic \: Value`

Intrinsic value: 71,0338983 = 71.03 dollars