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If Yumms Inc. is expected to pay dividends of $3.50 for the next seven years, and then after that the dividends are expe...

If Yumms Inc. is expected to pay dividends of $3.50 for the next seven years, and then after that the dividends are expected to stay at $4 indefinitely, what would you be willing to pay for a share of stock if the required return is 3.8%.?

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Answer #1

Value at year 7 = D8 / required rate

Value at year 7 = 4 / 0.038

Value at year 7 = 105.263158

Share price = Annuity * [1 - 1 / (1 + r)n] / r + FV / (1 + r)n

Share price = 3.5 * [1 - 1 / (1 + 0.038)7] / 0.038 + 105.263158 / (1 + 0.038)7

Share price = 3.5 * [1 - 0.770227] / 0.038 + 81.076487

Share price = 3.5 * 6.046658 + 81.076487

Share price = $102.24

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