Question

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $12.15, but management expects to reduce the payout by 6 percent per year, indefinitely. If you require a return of 10 percent on this stock, what will you pay for a share today?

Answer 1

$70.86

Step-by-step explanation:

The calculation of present value a share is shown below:-

Present value of share = Dividend (1 + Growth rate) ÷ (Rate of return + Growth rate)

= ($12.15 × (1 - 0.061)) ÷ (0.10 + 0.061)

= ($12.15 × 0.939) ÷ 0.161

= $11.40885 ÷ 0.161

= $70.86

Therefore for computing the present value we simply applied the above formula.