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18 November, 12:36

Bon Chance, Inc., has an odd dividend policy. The company has just paid a dividend of $3 per share and has announced that it will increase the dividend by $5 per share for each of the next four years, and then never pay another dividend. If you require a return of 9.7 percent on the company's stock, how much will you pay for a share today

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  1. 18 November, 12:39
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    If you require a return of 9.7 percent on the company's stock, you will pay $47.61 for a share today.

    Explanation:

    Price today = Present Value of Dividends

    Present Value of Dividends:

    Year Dividend Discounting Factor (9.7%)

    0 3.0000

    1 8.00 0.9115770282588880

    2 13.00 0.8309726784493050

    3 18.00 0.7574956047851460

    4 23.00 0.6905155923292130

    year Present Value (Dividend * Discounting factor)

    0

    1 7.2926162260711000

    2 10.8026448198410000

    3 13.6349208861326000

    4 15.8818586235719000

    Present Value of Dividends 47.612040555616600

    Therefore, If you require a return of 9.7 percent on the company's stock, you will pay $47.61 for a share today.
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