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Sorenson Corp.’s expected year-end dividend is D1 = $4.00, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock price in 7 years, i.e., what is Pˆ 7?

Respuesta :

Answer:

$93.80

Step-by-step explanation:

Data provided :

Year end dividend, D1 = $4.00

Required return, rs = 11% = 0.11

Dividend yield = 6% = 0.06

now,

Growth rate, g = Required return - Dividend yield

= 11% - 6%

= 5% = 0.05

Thus,

Sorenson’s expected stock price in 7 years = [tex]\frac{D1(1+g)^n}{rs-g}[/tex]

here,

n is the number of years i.e  7

therefore,

Sorenson’s expected stock price in 7 years = [tex]\frac{\$4.00\times(1+0.05)^7}{0.11-0.05}[/tex]

or

Sorenson’s expected stock price in 7 years = $93.80

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