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    Calculating how much should be paid for a stock

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    Anybody Coal Co. expects tough economic conditions for the foreseeable future. Their current beta is 1.2, the risk-free rate is 10% and the required rate of return on the market is 15%. Anybody paid a dividend of $4 today. Analysts are predicting a steady decline of 6% per year in dividends for the foreseeable future. What is the most you would be willing to pay for this stock?

    a) $0
    b) $42.40
    c) $44.94
    d) $17.09
    e) $25.00

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    Solution Preview

    First, calculate the expected return on the stock

    Let Ea= expected return on stock
    Rf = risk free rate
    Rm = market return
    Ba = beta of stock

    Ea = Rf ...

    Solution Summary

    The solution walks through the steps of calculating the price of the stock very clearly and concisely. The solution is in a very well-written format which makes it easy for any student to understand the process and the steps. Overall, an excellent response.