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29 May, 15:54

Constant growth: Moriband Corp. paid a dividend of $2.15 yesterday. The company's dividend is expected to grow at a steady rate of 5 percent for the next several years. If stocks of companies like Moriband require a rate of return of 15 percent, what should be the market price of Moribund stock?

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  1. 29 May, 16:51
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    The market price of moribund stock is $22.58

    Explanation:

    Let,

    Dividend = D0 = $2.15

    Growth rate = g = 5%

    rate of return = R = 15%

    Market price = P0 = D1 : (R - g)

    = D0 (1 + g) : (R - g)

    = $2.15 (1 + 0.05) : 0.15 - 0.05

    = $2.15 (1.05) : 0.1

    = $2.2575 : 0.1

    = $22.575

    Approximately $22.58

    The market price for moribund stock is $22.58
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