Question

Railway Cabooses just paid its annual dividend of $3.30 per share. The company has been reducing the dividends by 12.1 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent

Answer 1

Answer:

If the required rate of return is 14 percent, the price I am willing to pay is 11.113

Explanation:

To calculate what you are willing to pay today to purchase stock in this company if your required rate of return is 14 percent, you have to use the following formula.

Po = D1 / (k-g)

Po = purchase price

D1 = Dividend in paid in next year

k = required rate of return

g= growth rate

Po = (3.30 (1-0.121)) / (0.14-(-0.121))

Po = 2.9007/ 0.261

Po= 11.113.