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22 January, 06:24

Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share. After that, the dividend is expected to increase at a constant rate of 5%. If an investor requires a 12% return on the stock, what is the value of the stock?

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  1. 22 January, 06:47
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    The value of the stock is $28.57

    Explanation:

    Data provided in the question:

    Dividend paid at the end of the year, D1 = $2.00 per share

    Increase in dividend = $1.50 per share

    Growth rate, g = 5% = 0.05

    Required rate of return = 12% = 0.12

    Now,

    Price with constant Dividend Growth model = D1 : (r - g)

    = $2 : (0.12 - 0.05)

    = $28.57

    Hence,

    The value of the stock is $28.57
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