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Unformatted text preview: The answer is E 5 Clicker Question: • A stock’s just paid a dividend of $2.00. The dividend will grow at 15% for 2 years and then grow at 5% forever. The required discount rate is 10%. Calculate the price of the stock. • Hint: D 1 = $2.30, D 2 = $2.65 and D 3 = $2.78 A. $7.73 B.$25.73 C.$50.27 D.$52.73 E.$85.73 6 Clicker Answer: • g 1 = 15%, g 2 = 5%, R = 10% • D 1 = $2.30, D 2 = $2.65 and D 3 = $2.78 • The first dividend to which g 2 is applied is D 2 • Calculate P 1 using D 2 : P 1 = D 2 /(R – g 2 ) = $2.65/(0.10 – 0.05) = $53 • Calculate P as the PV of D 1 and P 1 : P = $2.30/(1.1) + $53/(1.1) = $50.27 The answer is C. 7...
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This note was uploaded on 12/06/2010 for the course BCOR 2200 at Colorado.
 '08
 TOMNELSON

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