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21 April, 16:50

MCMC just paid a dividend of $4.10 and is expected to increase the future dividends at a rate of 4% per year indefinitely. If the current share price is $40, what is the return required by shareholders?

a.) 12.65%

b.) 13.52%

c.) 13.99%

d.) 14.66%

e.) None of the above

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  1. 21 April, 17:16
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    d.) 14.66%

    Explanation:

    The computation of the return required by shareholders is shown below:

    Current share price = Next year dividend : (Required rate of return - growth rate)

    where,

    Next year dividend would be

    = $4.10 + $4.10 * 0.04

    = $4.10 + 0.164

    = $4.264

    So, the return required by shareholders

    $40 = $4.264 : (Required rate of return - 4%)

    After solving this equation,

    The required rate of return is 14.66%
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