Question

Hardwoods, Inc. is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to reduce the payout by 9 percent each year, indefinitely. How much are you willing to pay today per share to buy this stock if you require a 15 percent rate of return

Answer 1

$37.92

Step-by-step explanation:

D0 = $10

g = -9% it is negative since the payout will be reduced indefinitely

r =15%

P = ?

dividend discount model

P = D1/r-g

= 10 (1+(-0.09))/0.15-(-0.09)

=$37.9167/$37.92

Answer 2

$37.92 is the answer

Step-by-step explanation:

Stock price, P0 = D1÷(r+g)

D1 is next expected dividend

r is required return

g is growth rate

= $10×(1-9%)÷(15%+9%)

= $37.92