Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 12 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.)

Question

Business

Ronnie Black

23 April, 15:16

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $11.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 12 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.)

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Answers (1)

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Arianna Carney · Answer 1

The price of the stock is $66.5

Explanation:

The constant growth model of the DDM approach will be used to calculate the price of such a stock today.

The formula for the constant growth model is,

P0 or V = D0 * (1+g) / r - g

As the growth rate in the company's dividedn is negative, the growth rate will be - 5%.

The price of the stock is,

P0 = 11.9 * (1 - 0.05) / 0.12 + 0.05

P0 = $66.5