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Masteriza [31]
3 years ago
5

Item 15Item 15 Gee-Gee's is going to pay an annual dividend of $2.05 a share next year. This year, the company paid a dividend o

f $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth six years from now if the applicable discount rate is 11.2 percent
Business
1 answer:
meriva3 years ago
6 0

Answer:

$27.33

Explanation:

For computing the one share of the common stock after six years from now first, we have to determine the price of the common stock which is shown below

Price of the common stock = Next year dividend ÷ (Required rate of return - growth rate)

= $2.05 ÷ (11.2% - 2.50%)

= $23.56

The growth rate is

= ($2.05 - $2) ÷ ($2)

= 2.50%

Now the one share of the common stock after six years is

= $2 × 1.025^7 ÷ (11.2% - 2.50%)

= 2.3773715073  ÷ 8.7%

= $27.33

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