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4 February, 00:25

Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return

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  1. 4 February, 00:51
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    The maximum that should be paid for the stock today is $11.29

    Explanation:

    Given data

    D1 = $1.75

    g = - 1.5%

    r = 14%

    The maximum you would pay for the stock today is the same as the stock price today so the Gordon Growth model is appropriate to use

    SP = D1/r-g

    = 1.75/0.14 - (-0.015)

    1.75 / 0.155

    =$11.29
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