Antiques R Us is a mature manufacturing firm. The company just paid a $10 dividend, but management expects to reduce the payout by 6 percent per year indefinitely. Required : If you require an 14 percent return on this stock, what will you pay for a share today?
$46.53
$47.47
$117.50
$50.00
$47.00
Answer is $47.00
Last Dividend, D0 = $10.00
Growth Rate, g = -6%
Required Return, rs = 14%
Expected Dividend, D1 = D0 * (1 + g)
Expected Dividend, D1 = $10.00 * (1 - 0.06)
Expected Dividend, D1 = $9.40
Stock Price, P0 = D1 / (rs - g)
Stock Price, P0 = $9.40 / (0.14 - (-0.06))
Stock Price, P0 = $9.40 / 0.20
Stock Price, P0 = $47.00
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