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23 January, 02:31

Mayfield Inc. will pay a dividend of $3.14 per share next year. The company pledges to increase its dividend by 3.7 percent per year indefinitely. If you require a return of 10 percent on your investment, how much will you pay for the company's stock today

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  1. 23 January, 02:50
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    The price that will be paid for the stock today is $49.84

    Explanation:

    The company is expected to grow the dividends at a constant rate, thus the constant growth model of DDM will be used to calculate the price of the stock today. The formula for the price of the stock is:

    P0 = D1 / r - g

    Where,

    D1 is the dividend expected for the next period r is the required rate of return g is the growth rate in dividends

    P0 = 3.14 / (0.1 - 0.037)

    P0 = $49.84
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