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Your firm has a dividend policy that pays constant dividend of $1 per share to ordinary shareholders perpetually. Given your firm’s shareholders’ required rate of return of 5%, calculate the firm’s share price.Group of answer choices$20.00$2.00$200.00$0.05Next

Question

Your firm has a dividend policy that pays constant dividend of 1persharetoordinaryshareholdersperpetually.Givenyourfirmsshareholdersrequiredrateofreturnof51 per share to ordinary shareholders perpetually. Given your firm’s shareholders’ required rate of return of 5%, calculate the firm’s share price.Group of answer choices20.002.002.00200.00$0.05Next

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Solution

The price of a share in a firm that pays a constant dividend can be calculated using the Gordon Growth Model, which is a version of the dividend discount model. The formula is:

P = D / r

where: P = price of the share D = constant dividend per share r = required rate of return

Given in the question: D = $1 (constant dividend per share) r = 5% or 0.05 (required rate of return)

Substituting these values into the formula:

P = 1/0.05=1 / 0.05 = 20.00

So, the firm's share price is $20.00.

This problem has been solved

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