Question

Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year. The company is slowly downsizing and is decreasing its dividend by 3 percent annually. What is the current value of this stock at a discount rate of 8 percent?

Answer 1

Answer:

The current value of this stock should be $20.

Explanation:

The current value of this stock should be calculated by applying the formula to find present value of growth perpetuity. The formula is shown as below:

Stock price = D1 / ( Rate of required return - Growth rate of annual dividend)

in which: D1 = next year dividend = 2.20;

               Rate of required return = 8%;

               Growth rate of annual dividend = -3%.

So, Stock price = 2.2 / [8% - (-3%) ] = $20.

So, the answer is: the current value of this stock should be $20.