Question

Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $12.00, but management expects to reduce the payout by 5.25 percent per year, indefinitely.

Required:
If you require a return of 10 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Check the explanation

Step-by-step explanation:

Using the constant growth model which can be applied even if the dividends to be paid are declining by a constant or stable percentage, you just have to make sure that the negative growth is recognized. So, the price of the stock as at today will be calculated like:

P 0 = D 0 (1 + g ) / ( R – g )

P 0 = $11.40(1 – 0.0475) / [(0.08 – (–0.0475)]

P 0 = $85.16