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The next dividend for ABC Limited will be $0.6 per share (D 1). Investors require a...

The next dividend for ABC Limited will be $0.6 per share (D 1). Investors require a 13 % return on companies such as ABC Limited. ABC's dividend increases by 3 % every year. Based on the dividend growth model what is the value of ABC Limited shares today? Price to the nearest cent. Do not enter the $ sign.

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Answer #1

Information provided:

Current dividend= $0.6

Dividend growth rate= 3%

Required rate of return= 13%

The question can be solved using dividend growth model.

Value of the stock today=D1/(r-g)

Where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Value of the stock today= $0.6*(1+0.03)/ 0.13 – 0.03

                                     = $0.6180/ 0.10

                                    = $6.18

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