Homework #5 Chapter 8
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Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $7.65, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 12 percent on this stock, what will you pay for a share today?
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 = $7.65(1 − .05)/[.12 − (−.05)] P0 = $42.75
