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5. You are given the following data: i. The risk-free rate is 5 percent. ii. The required rate of return on stocks of Company A
5. You are given the following data: i. The risk-free rate is 5 percent. ii. The required rate of return on stocks of Company A is 8 percent. iii. The expected growth rate for the firm is 4 percent. The earnings and dividends of the firm are expected to grow at this rate forever. iv. The last dividend paid ( D0) was $0.80 per share. a. What is the expected price of the stock? b. After three years, assume that the following changes occur: (1) An increased degree of risk aversion causes the required return on the stocks of this company to go to 10 percent after adjusting for the changed inflation premium. (2) The expected growth rate increases to 6 percent. Given these changes occurred after three years, what is the expected price of the stock after these changes in year 3
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