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19 January, 09:21

The Red Bud Co. pays a constant dividend of $1.80 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 7.4 percent?

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  1. 19 January, 11:03
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    One share of this stock worth today if the required rate of return is 7.4 percent is $ 3.24

    Explanation:

    According to the details the dividend for the next 2 years = $1.80 a share and the required return is=7.40%.

    Hence to calculate current price of stock we have to use the following formula:

    current price = present value of future cash flows

    current price=$1.80/1.074 + $1.80/1.074∧2

    current price = $ 3.24

    current price of stock is $ 3.24
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