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The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent?

a. $13.89
b. $14.01
c. $14.56
d. $13.79
e. $13.28

Respuesta :

Parrain

Answer: a. $13.89

Explanation:

The relevant model/ formula to use is the Gordon Growth model which is;

Value of stock = Next dividend / (required return - growth rate)

The dividend is constant so the growth rate is 0%.

Required return will be the discount rate.

Value of stock = 2.25 / ( 16.2% - 0%)

= $13.89

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