Negative Growth Antiques R Us is a mature manufacturing firm. The company justpa

Question

Negative Growth

Antiques R Us is a mature manufacturing firm. The company justpaid a $12 dividend, but management expects to reduce the payout by7 percent per year indefinitely. If you require a 15 percent returnon this stock, you will pay $____________ for a share today

Negative Growth

Antiques R Us is a mature manufacturing firm. The company justpaid a $12 dividend, but management expects to reduce the payout by7 percent per year indefinitely. If you require a 15 percent returnon this stock, you will pay $____________ for a share today

Explanation / Answer

Dividend (D0) = $12

Dividend growth rate (g) = -7%

Required return (R ) = 15%

P0 = D1 / (R-g)

D1 = D0 (1+g)

D1 = $12 [1+(-0.07)]

D1 = $12 * 0.93

D1 = $11.16

P0   = $11.16 / [0.15-(-0.07)]

       = $11.16 / 0.22

       = $50.72

P0 (Current Share Value) =$50.72

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