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5 March, 07:43

A stock is expected to pay a $0.45 dividend at the end of the year (D1 = 0.45). The dividend is expected to grow at a constant rate of 4% a year, and the stock's required rate of return is 11%. What is the expected price of the stock 10 years from today?

a. $12.65

b. $ 9.15

c. $18.25

d. $ 9.52

e. $ 6.02

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  1. 5 March, 08:02
    0
    d. $ 9.52

    Explanation:

    The computation of the expected price of the stock 10 years from today is shown below:

    = Dividend at year 10 : (Required rate of return - growth rate)

    where,

    Dividend at year 10 is

    = $0.45 * (1 + 0.04) ^10

    = $0.67

    So, the expected price is

    = $0.67 : (11% - 4%)

    = $9.52

    By applying the formula we can easily find out the expected price of the stock
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