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29 April, 12:37

The Starr Co. just paid a dividend of $1.65 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. Investors require a return of 12 percent on the stock. What is the current price? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) What will the price be in three years? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.) What will the price be in 14 years?

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  1. 29 April, 12:54
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    (a) $24.75

    (b) $28.651

    (c) $49

    Explanation:

    Given that,

    Dividend paid recently = $1.65 per share

    Growth rate of dividend, g = 5% per year

    Return require, rr = 12 percent

    (a) Current price:

    = [Dividend paid * (1 + g) ] : (rr - g)

    = [$1.65 * (1 + 0.05) ] : (0.12 - 0.05)

    = $1.7325 : 0.07

    = $24.75

    (b) Price in three years:

    = Current price * (1 + g) ^ (3)

    = $24.75 * (1 + 0.05) ^ (3)

    = $24.75 * (1.05) ^ (3)

    = $24.75 * 1.157625

    = $28.651

    (c) Price in 14 years:

    = Current price * (1 + g) ^ (14)

    = $24.75 * (1 + 0.05) ^ (14)

    = $24.75 * (1.05) ^ (14)

    = $24.75 * 1.9799316

    = $49
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