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This afternoon, Northern Railways paid an annual dividend of $2.44 per share. The company has been...

This afternoon, Northern Railways paid an annual dividend of $2.44 per share. The company has been reducing the dividends by 15 percent each year (-15% growth rate of the dividend). How much are you willing to pay to purchase stock in this company if your required rate of return is 16 percent?

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Expert Solution

Ans $ 6.69

P0 = Price of Share
D1 = Current Dividend
Ke = Cost of Equity
g = growth rate
P0 = D1 / (Ke - g)
P0 = 2.0740 / (16% + 15%)
P0 = 6.69
D1 = D0* (1 + g)
D1 = 2.44* (1 - 15.00%)
D1 = 2.0740

jeff jeffy answered 2 years ago
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