Railway Cabooses just paid its annual dividend of $4.50 per share. The company h
ID: 2653074 • Letter: R
Question
Railway Cabooses just paid its annual dividend of $4.50 per share. The company has been reducing the dividends by 12.7 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?
$35.43
$14.71
$18.99
$15.05
$19.77
Railway Cabooses just paid its annual dividend of $4.50 per share. The company has been reducing the dividends by 12.7 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?
Explanation / Answer
Answer:
Calculation of Current Price of the share using dividend growth model :
Current Price = Expected Dividend / (Required rate – Growth rate)
Expected Dividend = Current Dividend * (1+ growth rate )
= 4.50 * (1-0.127)
=$3.9285
Hence
Current Price = 3.9285 /(14% +12.7%)
= $14.71
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.