Homework Answers
The current stock price is computed as shown below:
= Dividend in year 8 / ( 1 + required rate of return )8 + 1 / ( 1 + required rate of return )8 x [ Dividend in year 8 ( 1 + growth rate ) / ( required rate of return - growth rate ) ]
= $ 6 / 1.108 + 1 / 1.108 x [ ( $ 6 x ( 1 + 0.02 ) / ( 0.10 - 0.02 ) ]
= $ 38.49 Approximately
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