Stock Valuation
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Ferson, Inc., just paid a dividend of $3.00 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 16 percent return on the stock for thr first three years, a 14 percent return for the next three years, and then an 11 percent return thereafter. What is the current share price for Ferson stock?
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Solution Summary
The solution explains how to calculate the current price of stock using the dividend discount model.
Solution Preview
Since the discount rate changes, we need to calculate the values separately for the periods when the discount rate changes.
From year 7, the discount rate is 11%. We first calculate the Value in year 6 using the constant growth model. The dividends are growing at a constant rate of ...
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