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11 September, 08:41

Antiques 'r' us is a mature manufacturing firm. the company just paid a dividend of $12.30, but management expects to reduce the payout by 5 percent per year, indefinitely. if you require a return of 9 percent on this stock, what will you pay for a share today? (do not round intermediate calculations and round your answer to 2 decimal places,

e. g., 32.16.) current share price

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  1. 11 September, 11:22
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    The constant growth model can be used here even if the dividends are decreasing by a persistent percentage, just make sure to distinguish the negative development. So, the computation for the price of the stock today will be:

    P = dividend (1 + reduce payout) / (Return-reduce payout)

    P = $12.30 (1 - 0.05) / [ (0.09 - (-0.05) ]

    P = $11.69 / 0.14

    P = $83.46 is the price you will pay for a share today.
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