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General Importers announced that it will pay a dividend of $3.75 per share one year from...

General Importers announced that it will pay a dividend of $3.75 per share one year from today. After that, the company expec

General Importers announced that it will pay a dividend of $3.75 per share one year from today. After that, the company expects a slowdown in its business and will not pay a dividend for the next 6 years. Then, 8 years from today, the company will begin paying an annual dividend of $1.85 forever. The required return is 11.6 percent. What is the price of the stock today?
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Answer #1

HI

Price of stock will be equal to present value of all future dividends.

Here D1 = $3.75

D8 = $1.85

hence price of stock after 7 year from today = D8/r

= 1.85/11.6%

= $15.9483

Current Price of stock = 15.9483/(1+11.6%)^7 + 3.75/(1+11.6%)

= 7.397 + 3.360

   = $10.76

Thanks

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