Question
You are considering buying a share of Phillip Morris, which is expected to pay a dividend of $5.0 per share to its stockholders. You are
You are considering buying a share of Phillip Morris, which is expected to pay a dividend of $5.0 per share to its stockholders. You are expecting that the companys dividends will grow at a rate of 2% forever. Suppose that you are very uncertain about your dividend growth estimate, so you require a 10% rate of return. Ahmed, a medical specialist, is more certain about the 2% dividend growth and only requires a 5% rate of return.
a. Find the price that each of you is willing to pay for one share of Phillip Morris.
b. If you purchase one share of Phillip Morris at the value calculated in part a, what is your gain or lose per share if you sell the share when the required return on similar-risk shares has risen to 15%?
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