Last week, N&M Railroad paid its annual dividend of $1.50 per share. The company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of return is 15%?

Question

Quizplus · Accepted Answer

The stock price can be calculated using the Gordon Growth Model for a declining dividend, which is P = D1 / (r - g). Here, D1 = $1.50 * (1 - 0.10) = $1.35, r = 0.15, and g = -0.10. So, P = $1.35 / (0.15 + 0.10) = $5.40.

Last Week, N&M Railroad Paid Its Annual Dividend of $1