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stranahan stranahan
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Posts: 3324
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2 years ago
Haven, Inc. has an 11.5% required rate of return. It does not expect to initiate dividends for 20 years, at which time it will pay $3.75 per share in dividends. At that time, Haven expects its dividends to grow at 6% forever. What is an estimate of Haven's price in 20 years (P20) if its dividend at the end of year 20 is $3.75? What is its price in today's dollars if you desire a rate of return of 12%?
Textbook 

Financial Management: Core Concepts


Edition: 2nd
Author:
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flappunctualflappunctual
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Posts: 264
2 years ago
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We use the formula: Price = Div20 × (1 + g/r - g). Inserting in our values, we get: Price = P20 = $3.75 × (1 + 0.06/0.115 - 0.06) = ($3.975/0.055) = $72.2727 or about $72.27. To get today's price, we use the PVIF of (1/(1 + r)n) with r = 0.12 and n =20 to get P0 = ($72.2727/1.1220) = $7.4923 or about $7.49.
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