Question

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on this stock, what will you pay for a share today?

Answer 1

The amount to be paid for the stock: $1.82

Step-by-step explanation:

The value of a stock is the present value of future cash flows expected from the stock discounted at the required rate of return.

Where dividend is expected to decline by an annual rate , the price of a stock can still be determined using the dividend valuation model, but with a provision for a negative growth rate in dividend.

With a negative growth rate, the model is modified as follows:

P = D×(1-g) /(r - (-g))

D- 9, g - 8%, r- 14%

P = 9× (1-0.08)/(0.14-(-0.08)

= $1.8216

The amount to be paid for the stock: $1.8216

Answer 2

I will pay $40,9 for the share today

Step-by-step explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Formula to calculate the value of stock

Price = Dividend / ( Rate or return - growth rate )

Price = $9 / ( 14% - (-8%) )

Price = $9 / 14% + 8%

Price = $9 / 22%

Price = $40.9