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24 March, 06:22

The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? a. $37.05b. $38.16c. $39.30d. $40.48e. $41.70

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  1. 24 March, 09:06
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    Answer: The correct answer is "a. $37.05"

    Explanation:

    1) 1,55 x (1 + 0,015) = 1.5733 Div1

    1,57 x (1 + 0,015) = 1.5968 Div2

    1,5968 x (1+0,08) = 1.7246 Div3

    2) We use the dividend formula that grows at a "g" rate in perpetuity:

    V = 1,7246 / (0,12 - 0,08) = 43.115

    So Div2 = 43.115 + 1,5968 = 44,7118

    3) We use the Cash Flow function of the financial calculator:

    Div0 = 0

    Div1 = 1,57

    Div2 = 44,7118

    i% = 12

    Net present value = $37,05

    Or we calculate manual = 1.5733 / (1 + 0,12) + (1.5968 + 43.115) / (1+0,12) ^2

    =$37.05
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