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Cole Field Corporation pays a constant annual dividend of $2.50 per share. The shareholders of the...

Cole Field Corporation pays a constant annual dividend of $2.50 per share. The shareholders of the company’s main competitor face similar risk as those of Cole Field Corp. The competitor trades at $60, and its dividend last year was $1 and is expected to grow in perpetuity by 3% per year. What must Cole Field Corporation’s stock price be to reflect the similar risk between the two companies? (Rounded to the nearest dollar.)

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Answer #1

For competitor:

Required return=(D1/Current price)+Growth rate

=[(1*1.03)/60]+0.03

=0.047167(Approx)

Hence for Cole Field:

Stock price=Annual dividend/required return

=2.5/0.047167

=$53(Approx)

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