My sites 18W-MGMT130A-2 Final Final Control Panel Quiz navigation Question 12 Br
ID: 2547830 • Letter: M
Question
My sites 18W-MGMT130A-2 Final Final Control Panel Quiz navigation Question 12 Bruins R Us is a mature toy manufacturing firm. The company ust paid a dividend of $6.69, but management expects to reduce the payout by 5% per year, indefinitely. If you require a 13 percent return on this stock, what will you pay for a share today? Not yet 2 3 4 5 6 7 Select one: a. 87.81 b. 46.65 39.03 35.31 79.44 Points cut of 9 10 11 112I13 141.0o 5 16 17 18 19 20e iun Flae 2 23 nish attempt.. Previous page Next pageExplanation / Answer
Answer:
Option d i.e. $35.31 is Correct.
Required Return = D1 / P0 + g
Current Dividend (D0) = $6.69
Expected Dividend (D1) = $6.69 – ($6.69 * 0.05)
Expected Dividend (D1) = $6.69 - $0.3345
Expected Dividend (D1) = $6.3555
Required Return = 13%
Growth Rate = -5%
Current Price (P0) =??
0.13 = 6.3555 / P0 + (-0.05)
0.13 = 6.3555 / P0 – 0.05
0.18 = 6.3555 / P0
P0 = $35.31
Therefore, Current Price of Share is $35.31.
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