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Railway Cabooses just paid its annual dividend of $1.50 per share. The company has been reducing the dividends by 11.2 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 12 percent?

Respuesta :

Answer:

$5.69 per share

Explanation:

The computation of the price willing to pay is shown below:

As we already know that

Price = Next year dividend ÷ (Required rate of return - growth rate)

where,

Next year dividend is

= $1.50 × (1 - 0.112)

= $1.332

And, the other items would remain the same

So the price is

= $1.332 ÷ (12% + 11.2%)

= $5.69 per share

We simply applied the above formula so that the price could come

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