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A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is:

a. $30.29
b. $15.38
c. $16.31
d. $28.57

User TheJeff
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1 Answer

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Final answer:

Using the Gordon Growth Model, the estimated selling price of the stock with a $2.00 dividend expected to grow at 6% indefinitely and a required return of 13% is $30.29.

Step-by-step explanation:

To determine the estimated selling price of a stock that just paid a $2.00 dividend, which is anticipated to grow at 6% indefinitely, and where similar stocks are returning about 13%, we use the Gordon Growth Model (also known as the Dividend Discount Model). The formula for this model is P = D1 / (r - g), where P is the price of the stock, D1 is the expected dividend next year, r is the required rate of return, and g is the growth rate in dividends.

Applying this formula with the given values ($2.00 dividend, 6% growth rate, 13% required rate of return), the estimated selling price of the stock is calculated as follows:

P = $2.00 * (1 + 0.06) / (0.13 - 0.06) = $2.12 / 0.07 = $30.29.

Therefore, the correct answer is a. $30.29.

User GIA
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