Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.40, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?

Question

Business

Buddie

10 July, 13:22

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.40, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?

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Answers (1)

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Sullivan · Answer 1

The correct answer is $57.

Explanation:

According to the scenario, the computation of the given data are as follows:

Dividend = $11.40

Growth rate = - 0.05

Required rate of return = 0.14

So, we can calculate the price by using following formula:

Price = Dividend * (1 + Growth rate) : (return rate - growth rate)

By putting the value, we get

= $11.4 * (1 - 0.05) : (0.14 + 0.05)

= $57