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24 June, 10:34

Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina's stock if your goal is to earn a 10% rate of return?

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  1. 24 June, 10:37
    0
    What is the maximum amount you should pay to purchase a share of Angelina's stock.

    $36,00

    Explanation:

    The dividend discount model state that the price of a stock should be the result of the Present Value of all of its future dividends, the Gordon growth model indicates that:

    Price per Share = D / (r - g) = $2,16 / (0,10-0,04) = $36

    Where:

    D = the estimated value of next year's dividend

    r = The required rate of return

    g = the constant growth rate

    To this case the value is: $2,16 / (0,10-0,04) = $36
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