Question

Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year. The company is slowly downsizing and is decreasing its dividend by 3 percent annually. What is the current value of this stock at a discount rate of 8 percent?

Answer 1

$20

Step-by-step explanation:

using the Gordon growth model we can determine the price of the stocks:

stock price = dividends / (required rate of return - growth rate)

• dividends = $2.20
• required rate of return = 8%
• growth rate = -3%

stock price = $2.20 / (8% - -3%) = $2.20 / (8% +3%) = $2.20 / 11% = $20

Answer 2

Price of the share is $44

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.

As per given data

Dividend = $2.2

Growth rate = 3%

Discount rate = 8%

Formula to calculate the value of stock

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

Price = $2.2 / ( 8% - 3% )

Price = $2.2 / 0.08 - 0.03 )

Price = $2.2 / 0.05

Price = $44