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15 June, 22:05

Crosby Inc. has an 11% required rate of return. It will not pay any dividend until the end of year 20 at which time it will begin to pay an annual dividend of $4.00 per share which it will hold constant thereafter. What is an estimate of the price of Crosby's stock TODAY?

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  1. 15 June, 22:24
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    value of stock today = $5.01

    Explanation:

    given data

    required rate = 11%

    end of year = 20

    annual dividend = $4.00

    solution

    price of the stock at the end of 19th year is

    price of the stock = D : r ... 1

    dividends are paid at the end of 20th year

    we get price of the stock at the end of 19th year first

    price of the stock = $4 : 0.11

    price of the stock = $36.36

    value of stock today = 36.36 * / frac{1}{ (1+r) ^t} ... 2

    value of stock today = 36.36 * / frac{1}{ (1+0.11) ^{19}}

    value of stock today = $5.01
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