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Time left 1:3 45 Suppose you are considering a stock purchase for a 3-year investment horizon, with expected dividend payments of 20, and 25 per share in years 1, and 2, respectively. we assume your risk premium is 3% and the return of the safe asset is the 4%, what must your expected dividend be in year 3, if the expected future price of your stock is $24.95 at the end of year 3, and the most you would be willing to pay for the stock today is $20.89 per share? Not yet andeered Flag queston

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Answer #1

Required rate = Return on safe assets + Risk premium = 4%+3% = 7%

Price of Stock Today = Dividend 1/(1+r) + Dividend 2/(1+r)2 + Dividend 3/(1+r)3 + Price at year 3/(1+r)3

20.89 = 0.2/(1+7%) + 0.25/(1+7%)2 + Dividend 3/(1+7%)3 + 24.95/(1+7%)3

Dividend 3 = 0.156 or 0.16 per share

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