Which of the following amounts is closest to what should be paid for Overland co

Question

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%.

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25. These dividends are expected to grow at a rate of 5% in the foreseeable future. The required rate of return is 11%.

Explanation / Answer

Answer is 39.38

Divivdend paid D0                         2.25 Growth g 5% Dividend after 1 year D1 = D0(1+g) (2.25)(1.05) 2.3625 Ke 11% P0 = D1/(ke-g) P0 = 2.3625/(11%-5%) P0 = 2.3625/(6%) P0 = 39.38

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