Suppose that a firm just paid an annual dividend of $1.20 per share. This grows at 10%
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Question:
Suppose that a firm just paid an annual dividend of $1.20 per share. This grows at 10% per year for each of the next two years, after which it will grow at 3% per year forever. The market risk premium is 7%. The firm has a tax rate of 25%, cost of debt is 6%, market value based D/E is 0.5, ROE is 12%, beta is 1.5, Rf is 4%. Using the dividend discount model,
a) What discount rate will you use?
b) What is the logic for your answer to (a) above?
c) Use the dividend discount model to value the stock today.
Expert Answer:
a Discount Rate The discount rate used in the dividend discount model is the cost of equity Ke To ca... View the full answer
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