Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock. The firm has enjoyed a 4% annual growth rate over the past decade. If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock? Now, assume that you can only earn 6% on similar-risk investments. How much would you now be willing to pay for Milford Masonry’s stock?

Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock. The firm has enjoyed a 4% annual growth rate over the past decade. If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock? Now, assume that you can only earn 6% on similar-risk investments. How much would you now be willing to pay for Milford Masonry’s stock?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 13P

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Question

Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock. The firm has enjoyed a 4% annual growth rate over the past decade. If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock?

Now, assume that you can only earn 6% on similar-risk investments. How much would you now be willing to pay for Milford Masonry’s stock?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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