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Given the following financial and market data for KO, Coca-Cola: Price Forward Dividend Treasury Rate Expected...

Given the following financial and market data for KO, Coca-Cola:

Price Forward Dividend Treasury Rate Expected market return Coca cola Beta
$46 $1.56 2.8% 12% 0.6

a) What dividend growth rate is the market expecting for Coca-Cola?

b)If the future dividend growth rate is Coca-Cola was 6%, should you buy or sell Coca-Cola's stock? Explain.

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Answer #1

a)

Expected dividend growth rate (g) rs-D1÷P0
Here,
Stock price (P0) $                     46.00
Expected dividend (D1) $                       1.56
Required return ( r) 8.32% =2.8%+0.6*(12%-2.8%)
Expected dividend growth rate (g) 4.93%
8.32%-1.56÷46

b)

Yes, future growth dividend is higher than current growth rate. Yes, i should buy.

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