Railway Cabooses just paid its annual dividend of 490 per sh

Railway Cabooses just paid its annual dividend of $4.90 per share. The company has been reducing the dividends by 12.9 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 15 percent?

$15.49

$19.83

$20.76

$15.30

$37.98

Solution

Correct option is > $15.30

.

Stock price = P0 =?

Current dividend = D0 = 4.9

Growth rate = G = -12.9%

Expected rate = R = 15%

.

P0 = D0*(1+G)/(R-G)

P0 = 4.9*(1+(-12.9%))/(15%-(-12.9%))

P0 = $15.30