Question

foxtrap inc. is a mature manufacturing firm. the company just paid a $9.40 dividend, but management expects to reduce the payout by 4 percent per year indefinitely. if you require a 10 percent return on this stock, what will you pay for a share today? show your calculation steps clearly.

Answer 1

To calculate the price of a share of stock in Foxtrap Inc., use the Gordon Growth Model formula. The price is $156.67.

Step-by-step explanation:

To calculate the price you should pay for a share of the stock in Foxtrap Inc., you need to use the Gordon Growth Model formula. The formula is:

Price = Dividend / (Required Rate of Return - Dividend Growth Rate)

In this case, the dividend is $9.40, the required rate of return is 10%, and the dividend growth rate is 4%. Plugging in these values into the formula, we get:

Price = $9.40 / (0.10 - 0.04) = $9.40 / 0.06 = $156.67

You would pay $156.67 for a share of stock in Foxtrap Inc. today.