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    A stock valuation problem with growth of dividends: what would you pay for the stock?

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    A corporation paid a cash dividend of $0.75 for the fiscal year just completed. It is estimated that this firm's dividends will grow at 6% per year for the foreseeable future. If you are considering buying this firm's common stock, and, because of the risks involved, require a return of at least 9%, what is the most you should be willing to pay for this stock?

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    Solution Preview

    To answer this question you could use the constant growth dividend discount model, that is:


    Where P0 is the fair price for the firm's stock (or the price you should be willing to pay for the stock), D1 is the ...

    Solution Summary

    The solution states the formula to be used, then solves the problem.