Antiques ‘R’ Us is a mature manufacturing firm. The company just paid a dividend of $12.00, but management expects to reduce the payout by 5.25 percent per year, indefinitely.

Required:
If you require a return of 10 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e. g., 32.16).)

Check the explanation

Explanation:

Using the constant growth model which can be applied even if the dividends to be paid are declining by a constant or stable percentage, you just have to make sure that the negative growth is recognized. So, the price of the stock as at today will be calculated like:

P 0 = D 0 (1 + g ) / ( R – g )

P 0 = $11.40(1 – 0.0475) / [(0.08 – (–0.0475)]

P 0 = $85.16

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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