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CX Enterprises has the following expected? dividends: $1
CX Enterprises has the following expected? dividends: $1.03 in one? year, $1.23 in two? years, and $1.35 in three years. After?that, its dividends are expected to grow at 4.2% per year forever?(so that year? 4's dividend will be 4.2% more than $1.35 and so?on). If? CX's equity cost of capital is 12%?, what is the current price of its? stock?
Expert Solution
The value of the stock is computed as shown below:
= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + 1 / (1 + required rate of return)3 [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]
= $ 1.03 / 1.12 + $ 1.23 / 1.122 + $ 1.35 / 1.123 + 1 / 1.123 x [ ($ 1.35 x 1.042) / (0.12 - 0.042) ]
= $ 1.03 / 1.12 + $ 1.23 / 1.122 + $ 1.35 / 1.123 + $ 18.03461538 / 1.123
= $ 1.03 / 1.12 + $ 1.23 / 1.122 + $ 19.38461538 / 1.123
= $ 15.70
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