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ABC Limited has a stable sales track record but does not expect to grow in the...

ABC Limited has a stable sales track record but does not expect to grow in the future. Its last annual dividend was $1.75. If the required rate of return on similar investments is 14 percent p.a., what is the current share price? (to the nearest cent; don't use the $ sign)

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Answer #1

When a company finishes its growth part and achieves a stable state, its earnings generally get stagnant and therefore there are no chances of any increase in dividend. In this case, the dividends are considered to become a perpetual cash-flow and therefore share price of such company's stock is calculated using Present Value of a Perpetual Cash-flow formula.

Present Value of Perpetual Cash-flow = Cash-flow every year / Required Rate of Return
=> $1.75 / 0.14 = $12.5

So, the share price for ABC Limited's stock is $12.50.

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