Question

In: Finance

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but...

Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year indefinitely.

Required :

If you require an 12 percent return on this stock, what will you pay for a share today?

Expert Solution

Solution:-

Current dividend (DPS0)= $9.00

Growth rate (g) = -8.00%

Required rate of return (RR)= 12%

Now, dividend at first year end (DPS1)= DPS0*(1+g)

=$9.00*(1-0.08)

=$8.28

Using dividend growth model ,

Price of share today (P0)= DPS1/(RR-g)

=$8.28/(0.12+0.08)

=$8,28/0.20

=$41.40

Hence we will pay $41.40 for the share .

Please feel free to ask if you have any query in the comment section.

jeff jeffy answered 1 year ago

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