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14 January, 02:52

Williams Inc. is expected to pay a $5 dividend next year and that dividend is expected to grow at 2.5% every year thereafter. If the discount rate is 11.6%, what would be the present value of the expected dividend stream (aka the expected price of the firm's stock) ? g

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  1. 14 January, 03:03
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    Expected dividend (D1) = $5

    Cost of equity (Ke) = 11.6% = 0.116

    Growth rate (g) = 2.5% = 0.025

    Po = D1

    Ke - g

    Po = $5

    0.116 - 0.025

    Po = $5

    0.091

    Po = $54.95

    Explanation:

    The current market price of the stock is a function of expected dividend divided by the difference between expected return and growth rate.
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