Question

railway cabooses just paid its annual dividend of 1.70 per share. The company has been reducing the dividends by 11.3 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

8.24

Explanation:

According to the given situation, the computation of purchase stock is shown below:-

Purchase price = Dividend in paid in next year ÷ (required rate of return - Growth rate)

= (1.70 ÷ (1 - 0.113)) ÷ (0.12 - (-0.113))

= 1.92 ÷ 0.233

= 8.24

Therefore for computing the purchase price we simply applied the above formula.