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25 July, 09:51

Hancock Inc. retains most of its earnings. The company currently has earnings per share of $11. Hancock expects its earnings to grow at a constant rate of 2 percent per year. Furthermore, the average PE ratio of all other firms in Hancock's industry is 12. Hancock is expected to pay dividends per share of $3.50 during each of the next three years. If investors require a 10 percent rate of return on Hancock stock, a fair price for Hancock stock today is ___A) 113.95

B) 111.32

C) 131.49

D) none of the above

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  1. 25 July, 10:05
    0
    D1 = $3.50

    D2 = $3.50

    D3 = $3.50

    Ke = 10% = 0.1

    Po = D1 + D2 + D3

    (1+ke) (1+ke) 2 (1+ke) 3

    Po = $3.50 + $3.50 + $3.50

    (1+0.1) (1+0.1) 2 (1+0.1) 3

    Po = $3.18 + $2.89 + $2.63

    Po = $8.70

    None of the above

    Explanation:

    In this scenario, we need to discount the dividend in each year by the required at rate of return of 10%. The aggregate of the price obtained as a result of discounting in year 1 to year 3 gives the current market price.
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