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22 June, 09:49

How much are you willing to pay for one share of levine stock if the companies just paid $1.5 annual dividend, the dividends increase by 3% annually, and you require a 15% rate of return

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  1. 22 June, 09:59
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    Answer: $12.875

    Explanation:

    Required rate of return (r) = 15%

    Growth rate (g) = 3%

    Do = $1.5

    P = D1 : (r - g)

    P = current price of a share of stock

    D1 = expected Dividend at year end

    g = growth rate

    r = investor's required rate of return

    D1 = Do * (1 + g)

    Therefore,

    P = [ (Do * (1 + g)) : (r - g) ]

    P = [ ($1.5 * (1 + 0.03)) : (0.15 - 0.03) ]

    P = [ ($1.5 * 1.03) : 0.12]

    P = [ $1.545 : 0.12]

    P = $12.875
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