Antiques %u2018R%u2019 Us is a mature manufacturing firm. The company just paid

Question

Antiques %u2018R%u2019 Us is a mature manufacturing firm. The company just paid a $10.50 dividend, but management expects to reduce the payout by 4.5 percent per year, indefinitely.

Requirement: If you require a 10 percent return on this stock, what will you pay for a share today?

Antiques %u2018R%u2019 Us is a mature manufacturing firm. The company just paid a $10.50 dividend, but management expects to reduce the payout by 4.5 percent per year, indefinitely.

Requirement: If you require a 10 percent return on this stock, what will you pay for a share today?

Explanation / Answer

the constant growth model can be applied even if the divdends are declining by a constant percentage ,just make sure to recognize the negative growth .so the price of the stock will be

P=D0(1+g)/(R-g)

=10.5(1-0.045)/(0.10-(-0.045))

=$69.155

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