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2. The common stock ABC Co. is trading at $40 per share. In the past the company has paid a constant dividend of $ 6 per shar
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Answer #1

Before the Announcement:

Required Return = Constant Dividend / Market Price of the stock = $6 / $40 = 0.15, or 15%

After the Announcement:

Required Return(Before the Announcement) = Required Return(After the Announcement) = 15%

Stock Price after the announcement = [Current Dividend * (1 + g)] / [r - g]

= [$6 * (1 + 0.04)] / [0.15 - 0.04] = $6.24 / 0.11 = $56.73

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