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 $10.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 10 percent on this stock, what will you pay for a share today?

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $10.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 10 percent on this stock, what will you pay for a share today?

Explanation / Answer

Calculation of D1 = 10.90(1-0.05)

= 10.355

Price of the stock = D1/Ke-G

= 10.355/(0.10-(-0.05))

= 10.355/0.15

= 69.033

I will pay 69.033 for the stock today

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