Hardwoods,Inc.is a mature manufacturing firm.The company just paid a $10 dividend,but management expects to reduce the payout by 9 percent each year,indefinitely.How much are you willing to pay today per share to buy this stock if you require a 15 percent rate of return?

Question

Quizplus · Accepted Answer

We can use the constant growth dividend discount model to calculate the present value of the stock:
PV = D / (r-g)
where PV is the present value, D is the most recent dividend, r is the required rate of return, and g is the expected growth rate of dividends.

In this case, D = $10, r = 15%, and g = -9% (since the dividend is expected to decrease). Plugging in the values, we get:
PV = $10 / (0.15 - (-0.09)) = $37.92

Therefore, the maximum amount you should be willing to pay per share to buy this stock is $37.92.

Choice B is the only option that is closest to this value.