Nuts Incorporated is expected to pay annual dividends of $3.33 and $4.44 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $4.66 a share. What is the value of this stock at a required return of 10.8 percent?

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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**Stock Valuation Problem**

Nuts Incorporated is projected to distribute annual dividends of $3.33 and $4.44 at the end of the next two years, respectively. Following these two years, the company anticipates paying a constant dividend of $4.66 per share. The question is: What is the value of this stock if the required return is 10.8 percent?

**Options:**

- $27.11
- $28.05
- $28.23
- $28.36
- $31.08
Transcribed Image Text:**Stock Valuation Problem** Nuts Incorporated is projected to distribute annual dividends of $3.33 and $4.44 at the end of the next two years, respectively. Following these two years, the company anticipates paying a constant dividend of $4.66 per share. The question is: What is the value of this stock if the required return is 10.8 percent? **Options:** - $27.11 - $28.05 - $28.23 - $28.36 - $31.08
Expert Solution
Step 1: Introduction:

The constant growth model is a stock valuation method used in finance to determine a stock's intrinsic value based on dividends. The model assumes that dividend growth will continue at a steady rate. It might not be appropriate for businesses with unpredictable dividend payout schedules, and the correctness of the model depends on the consistency of the growth rate assumption. This concept only applies to dividends with a constant growth rate. Or, more precisely, it is only relevant for stocks of companies with stable growth rates in dividends per share.

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