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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 5%, and the market risk premium is 6%.

21-1 VALUATION Van Buren currently expects to pay a year-end dividend of $2.00 a share (D1 = 2.00). Van Buren’s dividend is expected to grow at a constant rate of 5% a year, and its beta is 0.9. What is the current price of Van Buren's stock?

Summary Introduction

To Determine: The current price of Corporation V’s stock.

Introduction: A stock is a common word used to represent the proprietorship statements of any organization. A share alludes to the stock declaration of a specific organization.

Explanation

Determine the required return of the stock

RequiredReturn(rs)=[RiskfreeRate(rf)+Beta(β)×MarketRiskPremium(rm)]=[5%+0.9×6%]=[5%+5.40%]=10.40%

Therefore the required return of the stock is 10

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