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12 November, 11:12

The Felix Corp. will pay an annual dividend of $1.00 next year. The dividend will increase by 12 percent a year for the following two years before growing at 4 percent indefinitely thereafter. If the required rate of return is 10 percent, what is the stock's current value?

Select one:

a. $13.38

b. $14.05

c. $19.11

d. $9.80

e. $10.38

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Answers (1)
  1. 12 November, 11:15
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    c. $19.11.

    Explanation:

    The Felix Corp current stock value will be determined by using formula:

    D1 / (1 + r) ^ 1 + D2 / (1 + r) ^ 2 + D3 / (1 + r) ^ 3 + D4 / (1 + r) ^ 3

    It has paid dividend of $1.00 which will grow at 12% per year for 2 years and at 4% indefinitely after 2 years.

    D1 = $1.00

    D2 = $1.00 * 1.12 = $1.12

    D3 = $1.12 * 1.12 = $1.25

    D4 = ($1.25 * 1.04) / (0.10 - 0.04) = $21.67

    Using formula the stock value will be:

    $1.00 / 1.10 + $1.12 / (1.10) 2 + $1.25 / (1.10) 3 + $21.67 / (1.10) 3

    Current stock value = $19.11.
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