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7 March, 20:28

A firm is planning to pay a dividend of $1.50 in a year. The growth rate of dividend is expected to be 4% a year and the required rate of return is 9%. What is the value of this stock

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  1. 7 March, 21:01
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    Step-by-step explanation:

    P = D1 / (r - g)

    P=Current price or stock value

    D1 = the value of next year's dividend = $1.5

    r = the cost of equity capital=9%

    g = the dividend growth rate=4%

    The dividend discount model's formula is:

    P = D1 / (r - g)

    D1=1.5

    g=4%=0.04

    r=9%=0.09

    Then,

    P=1.5 / (0.09-0.04)

    P=1.5/0.05

    P=$30

    The value of the stock is $30
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