Question
1. Jennifer purchased a share of ABC one year ago at a price of $4.50. The company just paid 40 cents dividend per share and
1. Jennifer purchased a share of ABC one year ago at a price of $4.50. The company just paid 40 cents dividend per share and the next year's dividend will be paid in one year. The discount rate of ABC's shares is 8% per year. What price should the share be sold at if ABC's annual dividends will remain constant perpetually?
A. $6.00B. $5.60C. $5.00D. $4.00E. $4.90
2. Jennifer purchased a share of ABC one year ago at a price of $4.50. The company pays an annual dividend of 40 cents per share and the current year's dividend is due immediately, The discount rate of ABC's shares will be 7% per year for the next five years, and then it will increase to 10% per year. What price should the share be sold at NOW if ABC's dividends will remain constant for the next five years (i.e. ABC pays 40 cents dividend per share now, in one year, in two years, ... and in five years), and then will grow at a constant rate of 2% per year five years from now?
A. $7.74 B. $6.64 C. $5.68 D. $6.08 E. $5.28
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