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2504c_chap8_exercises

# 2504c_chap8_exercises - Dividend Growth Model Practice...

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Dividend Growth Model - Practice Questions (1) Find the price of a stock (P 0 ) if the dividend just paid (D 0 ) = \$1.50; the growth rate of dividends, g, is 10%; and the cost of equity (R E ) = 12%. (2) Find the price of a stock (P 0 ) if the dividend just paid (D 0 ) = \$2.50; the growth rate of dividends is 5%; and the cost of equity (R E ) = 20%. (3) What is the value of stock in a company that just paid out \$1.50 per share in dividends and expects these dividends to grow at a rate of 6% forever, if investors require a 13% return? (4) If the price of a stock (P 0 ) is \$40; the dividend paid (D 0 ) = \$4; the cost of equity (R E ) = 15%, find g. (5) If P 0 is \$20, D 0 = \$2.20; and the growth rate in dividends is 12%. Find R E . (6) AOL’s dividends grow at a rate of 25% for the first 4 years, and then at a rate of 5% thereafter. If D 0 = \$15; and R E = 12%; find the price of the stock. (7) AOL’s dividends grow at a rate of 40% for the first 6 years, and then at a rate of 12%. If D 0 = \$25; and R E = 20%; find the price of the stock. (8) AOL’s dividends grow at a rate of 30% for the first 5 years, and then at a rate of 10%.

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