In: Finance
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? |
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 .
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