Question

Railway Cabooses just paid its annual dividend of $1.90 per share. The company has been reducing the dividends by 11.4 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 12 percent

Answer 1

$7.2

Step-by-step explanation:

Railway cabooses pay an annual dividend of $1.90 per share

This amount is always reduced by 11.4% each year

= 11.4/100

= 0.114

The required rate of return is 12%

= 12/100

= 0.12

Therefore the amount in which the stock can be purchased in the company is calculated as follows:

Po= [1.90×(1+(-0.114)/0.12-(-0.114)

= [1.90×(1-0.114)/(0.12+0.114)]

= [1.90×(0.886/0.234)

= 1.90×3.786

= $7.2

Hence I am willing to pay $7.2 to purchase stock in this company.