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4 June, 15:22

Jefferson's recently paid an annual dividend of $1.31 per share. The dividend is expected to decrease by 4% each year. How much should you pay for this stock today if your required return is 16%?

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  1. 4 June, 17:34
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    I should pay $10.92 per share for the stock today as shown below

    Explanation:

    The maximum price a rational investor could pay for a share is given by the formula:

    Po=Div/rate of return-growth rate

    Po is the price to paid

    Rate of return here is 16%, which is similar to return on equity

    The growth rate of the share of the dividend is 4%

    Po=$1.31 / (0.16-0.04)

    Po = $10.92

    The price has factored in both the dividend yield and gains yield of the share.

    dividend yield is the return earned by share through dividends

    gains yield is another return earned by share through appreciation in its price in the market place-stock exchange

    Total return on return on share is the sum of both.
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