Antiques R Us is a mature manufacturing firm The company jus

Antiques R Us is a mature manufacturing firm. The company just paid an $11 dividend, but management expects to reduce the payout by 6 percent per year indefinitely. Required : If you require an 13 percent return on this stock, what will you pay for a share today?

A$53.88

B$54.97

C$54.42

D$57.89

E$147.71

Solution

C) $54.42

The constant growth model can be applied even if the dividends are declining by a constant percentage, just make sure to recognize the negative growth. So, the price of the stock today will be:

P0= D0(1 + g) / (R– g)

P0= $11(1 – 0.06) / [(0.13– (–0.06)]

P0= $54.42