Question

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 1

Answer:The answer is $16.66

Step-by-step 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

Answer 2

$22.875

Step-by-step explanation:

P0 = D0 (1 + g) / (R - g)

P0 = 9.15(1-.05) / [.15 - (-.05)]

P0 = $22.875