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Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company...

Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent? Select one: a. $18.30 b. $22.17 c. $22.94 d. $19.28 e. $22.48

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Answer #1

Answer: b

Stock price = Per-share dividend for next year / (Required rate of return – Dividend growth rate)

                        = 1.88 / (0.0968 – 0.012)

                        = 1.88 / 0.0848

                        = 22.1698113

                        = 22.17 rounded to 2 decimal places

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