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gtnhenbr [62]
3 years ago
11

The last dividend on Spirex Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a r

ate of return of 20 percent, what is the highest price you should be willing to pay for this stock?
Business
1 answer:
grandymaker [24]3 years ago
4 0

Answer:

$44

Explanation:

Data provided in the question:

Dividend on Spirex Corporation's common stock = $4.00

Expected growth rate, g = 10%

Required rate of return, r = 20%

Now,

Price willing to pay = \frac{\textup{D1}}{\textup{r - g}}

here,

D1 = dividend at end of year

or

D1 = $4 × (1 + r )

or

D1 = $4 × ( 1 + 0.1 )

or

D1 = $4.4

Thus,

Price willing to pay = \frac{\textup{4.4}}{\textup{0.2 - 0.1}}

or

Price willing to pay = $44

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