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%?

A) $5.40
B) $6.00
C) $15.60
D) $27.00
E) $30.30

Question

Lilian Floriano · Accepted Answer

Final Answer : A, Explanation :  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 $1.50 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%?

A) $5.40
B) $6.00
C) $15.60
D) $27.00
E) $30.30

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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%?A) $5.40B) $6.00C) $15.60D) $27.00E) $30.30

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Learning Objectives

Learning Objectives

Related questions

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%?

A) $5.40
B) $6.00
C) $15.60
D) $27.00
E) $30.30