A company currently reported dividend of $12. It is expected that will reinvest 50% of its earnings perpetually. The return on equity of the company is 20% and remains unchanged in the future. Suppose the cost of equity of the company is 13%, what is the fair price of the stock based on the dividend discount model?
A company currently reported dividend of $12. It is expected that will reinvest 50% of its earnings perpetually. The return on equity of the company is 20% and remains unchanged in the future. Suppose the cost of equity of the company is 13%, what is the fair price of the stock based on the dividend discount model?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![A company currently reported dividend of $12. It is expected that will reinvest 50%
of its earnings perpetually. The return on equity of the company is 20% and remains
unchanged in the future. Suppose the cost of equity of the company is 13%, what is
the fair price of the stock based on the dividend discount model?
A. $200
В. S220
C. $400
D. $440](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F822b45da-b5a8-4d9e-aeaa-24faff0838c5%2Fee641b27-f553-4708-ada3-574e0e820ce2%2F92ujaln_processed.png&w=3840&q=75)
Transcribed Image Text:A company currently reported dividend of $12. It is expected that will reinvest 50%
of its earnings perpetually. The return on equity of the company is 20% and remains
unchanged in the future. Suppose the cost of equity of the company is 13%, what is
the fair price of the stock based on the dividend discount model?
A. $200
В. S220
C. $400
D. $440
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