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Use the dividend discount model (aka the Gordon model) to compute the return on equity for the firm. assume that dividend today is $1 and
Use the dividend discount model (aka the Gordon model) to compute the return on equity for the firm. assume that dividend today is $1 and that it is expected to grow at the rate of 2% per year. price = (d(1+g))(r-g) i. If the share price today is $15 then what is the return on equity? V = (D(1+9))/(r-g) ii. Suppose the firm decides to repurchase 10% of its shares a year from today. where Vis price multiply Today there are 10 million shares outstanding. How will the return on equity be affected? Use formula and reasoning to explain your answer. iii. Suppose two firms are comparable in every way including the dividend payment but one firm has more debt. How would this affect the rate of return on equity? Why? Explain in terms of the formula. by # of shares
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