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4 November, 08:24

Harbour View Company common stock has a $30 par value and is currently selling for $65. Industry analysts are predicting dividends to grow at 7.5 percent per year for the foreseeable future. Recently, Harbour View paid a dividend of $1.70. What is the expected rate of return for the stock

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  1. 4 November, 08:33
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    The expected rate of return on this stock is 10.31%

    Explanation:

    The constangt growth model of the DDM approach is used to calculate the price of a share based on the edxpected future dividends from a stock that are growing at a constant rate. The formula for price using constant growth model is,

    P0 = D0 * (1+g) / (r - g)

    Plugging in the values,

    65 = 1.7 * (1+0.075) / (r - 0.075)

    65 * (r - 0.075) = 1.8275

    65r - 4.875 = 1.8275

    65r = 1.8275 + 4.875

    r = 6.7025 / 65

    r = 10.31% or 0.1031
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