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17 April, 11:18

MainCup Inc. just paid a dividend of $2.50 per share. The dividends are expected to increase by 20 percent per year for the next two years and then increase by 3 percent annually thereafter. What is the current value per share is the appropriate discount rate is 12 percent? A. $35.52B. $38.39C. $41.27D. $45.69

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  1. 17 April, 13:54
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    The correct Answer is B.$38.39.

    Explanation:

    This question requires us to tell current market value of MAIN CUP INC share. To calculate market value we have to discount all dividend future payments using market rate of return. Detail calculations are given below.

    Year 1 discount factor = 1/1.12 = 0.893-A

    Year 2 discount factor = A/1.12 = 0.797-B

    Year 1 Dividend = 2.5 * 1.2 = 3-C

    Year 2 Dividend = C * 1.2 = 3.6-D

    Terminal Value Year 2 = 3.6 (1.03) / (0.12-0.03) = 41.2-E

    Market Value = (A*C) + ((D+E) * B) = $ 38.30
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