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3 June, 22:55

A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $2.10, what is the value of the stock? (Round your answer to 2 decimal places.)

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  1. 3 June, 23:03
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    The value of the stock is $19.18

    Explanation:

    First we have to find the required rate of return on the bond using the capm formula. Capm = Risk free rate + Risk premium of the stock

    =7%+4% = 11%

    The required return on the stock is 11%. Now we can use the dividend discount method to find teh value of the stock.

    The formula is Dividend * (1+G) / R-G

    Where R is the required rate of return and G is the growth of the stock.

    In this case the dividend is expected to remain at 2.10 so we assume the growth of the stock to be 0.

    2.10/0.11=19.18
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