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If Negan Corp. common stock is valued at $40 per share, dividends are paid quarterly and...

If Negan Corp. common stock is valued at $40 per share, dividends are paid quarterly and expected to grow quarterly by 1.2% forever, and the next dividend is due in 3 months and expected to be $3, then what is the expected annual return on Negan Corp. stock?

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Answer #1

Next Dividend = $3

g = Growth rate = 1.2%

Price of Common Stock = $40

Rate of return for 3 months = r

Price of common stock today = Next dividend / (r - g)

$42 = $3 / (r - 1.2%)

(r -1.2%) = 0.071429

(r - 1.2%) = 7.1429%

r = 8.3429%

Annual Return for Negan Corp. Stock = 8.3429% * 4 = 33.3716%

Annual Return for Negan Corp. Stock is 33.37%

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