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D Question 1
1 pts
ABC, Inc. pays a dividend of [tex]$3.76 per year infinitely. If the required rate of return on ABC's stock is 10.02% per year, what is today's price
of the stock?
i
Enter your answer rounded off to two decimal points. Do not enter $[/tex] or comma in the answer box.
D
Question 2
I
1 pts

Sagot :

GinnyAnswer
To determine today's price of ABC, Inc.'s stock, we will use the Gordon Growth Model, also known as the Dividend Discount Model for a perpetuity with no growth. The formula for the price of a stock in this model is given by:

[tex]\[ P_0 = \frac{D}{r} \][/tex]

where:
- [tex]\( P_0 \)[/tex] is the current stock price.
- [tex]\( D \)[/tex] is the annual dividend.
- [tex]\( r \)[/tex] is the required rate of return.

Given:
- The annual dividend [tex]\( D \)[/tex] is $3.76.
- The required rate of return [tex]\( r \)[/tex] is 10.02%, or 0.1002 when expressed as a decimal.

Step-by-step solution:
1. Substitute the given values into the formula:

[tex]\[ P_0 = \frac{3.76}{0.1002} \][/tex]

2. Perform the division:

[tex]\[ P_0 = \frac{3.76}{0.1002} = 37.5249500998004 \][/tex]

3. Round the result to two decimal places:

[tex]\[ P_0 \approx 37.52 \][/tex]

Therefore, today's price of the stock is [tex]\( \mathbf{37.52} \)[/tex].
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