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Finance 320 Problem Set#7
1.
The stock of Merton Inc. currently has a required rate of return of 15% and its dividends are growing at the rate
of 3% per year.
If
Merton just paid a dividend of $1 this year, what is the current price of a share of Merton
stock based on the Dividend Growth Model?
2.
Black and Scholes Co. is expected to maintain a constant 4% growth rate in its dividends indefinitely. If the
company has a dividend yield of 6%, what is the required return on Black and Scholes' stock?
3.
You want to estimate the current price ofa share of Duffie Corp. stock. You know that next year's dividend is
expected to be $2.20 and the growth rate of dividends is 5%. You look in the Wall Street Journal and find that
the riskfree interest rate is 4%. You also know from looking in Valueline that Duffie Corp. has a beta of 1.35.
If the required return on the market is currently 12%, what is Duffie's current share price?
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 Fall '10
 Sapp
 Finance, Debt, Firm, Weighted average cost of capital, Mathematical finance, Dynamo Inc.

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