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A-2- A - A - Α Α 1 Body lext Heading List Par
A-2- A - A - Α Α 1 Body lext Heading List Par. Font Paragraphs & The common stock of Auto Deliveries sells for $28.16 a sbare. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed The firm has established a pattern of increasing its duidends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock? A. 7.42 percent B. 7.79 percent C. 19.67 percent D. 20.14 percent E. 20.86 percent Po=D1 (g) = 1.357 (r - 3ºo)
Expert Solution
The overall required rate of return will be calculated using dividend discounting model.
Intrinsic value of share=[expected dividend/(required rate of return - growth rate of dividend)]
28.16= 1.35/(Ce-.03)
Cost of equity= (1.35+.8448)/.2816= 7.79%
Correct answer is option (B) 7.79%
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