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The CFO of a publicly traded company is expecting to pay a dividend next year of $1.25 and projecting that the price of the company’s stock will be $45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today?

Question

The CFO of a publicly traded company is expecting to pay a dividend next year of 1.25andprojectingthatthepriceofthecompanysstockwillbe1.25 and projecting that the price of the company’s stock will be 45 in 1 year. The CFO has determined that the required rate of return for the company is 10%. Based on the data available, what is the value of one share of stock today?

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Solution

To calculate the value of one share of stock today, we can use the dividend discount model (DDM). The DDM formula is:

Value of Stock = Dividend / (Required Rate of Return - Dividend Growth Rate)

In this case, the dividend is $1.25 and the required rate of return is 10%. However, we need to determine the dividend growth rate.

To find the dividend growth rate, we can use the formula:

Dividend Growth Rate = (Expected Dividend - Current Dividend) / Current Dividend

The expected dividend is $1.25 and the current dividend is unknown. Therefore, we cannot calculate the dividend growth rate.

Without the dividend growth rate, we cannot determine the value of one share of stock today using the DDM.

This problem has been solved

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