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20 October, 02:34

Craftwell Inc. pays a $0.75 dividend every quarter and will maintain this policy forever. What price should you pay for one share of common stock if you want an annual return of 10.5% on your investment?

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  1. 20 October, 02:42
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    Quarterly dividend (D) = $0.75

    Annual return (Ke) = 10.5% = 0.105

    Quarterly return = 0.105/4 = 0.02625

    Current market price = Quarterly dividend

    Quarterly return

    = $0.75

    0.02625

    = $28.57

    Explanation:

    Current market price is the ratio of quarterly dividend paid divided by quarterly return.
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