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Edison has just paid an annual dividend of $3 per share. If the expected growth rate for Con Ed is 10%, and your required rate of return is 16%, how much are you willing to pay for this stock

Respuesta :

Answer:

$55 per share

Explanation:

This can be calculated using the dividend discount model (DDM) formula as follows:

P = D1/(r - g) ............................ (1)

Where,

P = Current stock price or the amount you are willing to pay today

D1 = Next dividend = Current dividend * (1 + Growth rate) = $3 * (1 + 0.10) = $3.30

r = required return = 16%. or 0.16

g = growth rate = 10% = 0.10

Substituting the values into equation (1), we have:

P = $3.30 / (0.16 - 0.10) = $55 per share

Therefore, you are willing to pay $55 per share for this stock.