Question

jefferson's recently paid an annual dividend of $6 per share. the dividend is expected to decrease by 5% each year. how much should you pay for this stock today if your required return is 11% (in $ dollars)? $ .

Answer 1

$54.54

Step-by-step explanation:

To find the price of Jefferson's stock today, we can use the formula for the present value of an annuity:

Price = (Annual dividend / Required rate of return) * (1 - (1 / (1 + Required rate of return)^Number of years))

In this case, the annual dividend is $6, the required rate of return is 11%, and the number of years is not given. Since the dividend is expected to decrease by 5% each year, we need to calculate the present value of an infinite series of decreasing dividends.

To do this, we can use the formula for the present value of a perpetuity:

Price = (Annual dividend / Required rate of return)

In this case, the annual dividend is $6 and the required rate of return is 11%, so the price of the stock is:

Price = ($6 / 0.11)

This simplifies to:

Price = $54.54

Therefore, you should pay approximately $54.54 for this stock if your required return is 11%.

Note that this calculation assumes that the required rate of return, the annual dividend, and the rate of decrease of the dividend are all fixed and do not change. In reality, these values may change over time, which could affect the price of the stock.