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Noel Company's common stock has just paid a $2.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A. $15.00 B. $22.22 C. $23.33 D. $40.00

Question

Noel Company's common stock has just paid a 2.00dividend.IfinvestorsbelievethattheexpectedrateofreturnonP.Noelis142.00 dividend. If investors believe that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock? A. 15.00 B. 22.22C.22.22 C. 23.33 D. $40.00

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Solution

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

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

Given that the dividend is $2.00, the expected rate of return is 14%, and the dividend growth rate is 5%, we can substitute these values into the formula:

Value of Stock = $2.00 / (0.14 - 0.05)

Simplifying the equation:

Value of Stock = $2.00 / 0.09

Value of Stock = $22.22

Therefore, the value of a share of P. Noel stock is $22.22.

The correct answer is B. $22.22.

This problem has been solved

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