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1 January, 07:17

Kay's Sewing Loft is going to reduce its annual dividend by 10 percent a year for the next two years. After that, it will maintain a constant dividend of $2 a share. Last year, the company paid an annual dividend of $3 per share. What is the market value of this stock if the required return is 13.7 percent? Group of answer choices

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  1. 1 January, 08:12
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    The answer of the following question is $ 25.711

    Explanation:

    Dividend (D0) = $ 3 per share

    D1 = $ 3 * (1 - 0.10) = 2.7 per share

    D2 = $ 2.7 * (1 - 0.10) = 2.43 per share

    P0 = $ 2 / 0.137 = $ 14.598

    Market value of this stock = D1 * PVF 1 + D2 * PVF2 + P0 * PVF2

    = 2.7 * 1 / (1+0.137) + 2.43 * 1 / (1 + 0.137) ^2 + 14.598 * 1 / (1 + 0.137) ^2

    = 3.699 + 3.141 + 18.871

    = $ 25.711
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