Antiques R Us is a mature manufacturing firm. The company just paid a dividend o

Question

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $7.65, but management expects to reduce the pay out 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? (Round your answer to 2 decimal places. (e.g., 32.16))

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $7.65, but management expects to reduce the pay out 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? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Okay first what's the new dividend? $10 x (1 - .06) = $9.40 is the next dividend. It's hard to tell from the question but I'm going to assume they mean it gets reduced and then stays at that level.

Now you should have been given a dividend model that looks something like this

Po = D / r = 9.40 / .11 = $85.45

Now if they are actually trying to say that it will be reduced repeatedly. You have this model

Po = D1 / (r - g) = 9.40 / (.11 - -.06) = 9.40 / .17 = $55.29 but this seems rather odd so I am thinking the former is the way to go.

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