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Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the
Suppose D0=1 and D1=$1.05 and it is expected that earnings and dividends will grow at a constant rate of 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced and the required rate of return is 9.00%. When the growth rate is years from today P0(1+rs)4P1(1+g)4rsgD1P0(1+g)4 the required rate of return, you can use the following formula to calculate the price of the stock 4 And the price of the stock 4 years from today is Step 3: Practice: Constant Growth Valuation Now it's time for you to practice what you've learned. Suppose that a stock is expected to pay a dividend of $4.25 at the end of this year and it is expected to grow at a constant rate of 5.00% a year. If it is required return is 9.00%. What is the stock's expected price 4 years from today? $101.19 $106.25 $129.15 $149.98
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