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# a stock sells for \$40. The next dividend will be \$4 per share.

if the rate of return...
a stock sells for \$40. The next dividend will be \$4 per share. if the rate of return erarned on reinvested funds is 15 percent and the company reinvests 40 percent of earning in the firm. What must be the discount rate?
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Answered in 2 minutes by:
8/12/2009
RD, Certified Public Accountant (CPA)
Category: Finance
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Experience: MBA, CPA
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Using Constant-growth model,

stock price P = Div(1)/(r-g)

Where

p=\$40

Div(1)= next dividend = \$4

r= discount rate = ?
g = growth rate which is =rate of return on reinvested fund*retention rate

= 0.15*0.40

=0.06

Hence

As per Constant growth model

40 = 4/(r-0.06)
r - 0.06 = 4/40

r = 0.1+0.06

=0.16

Discount rate = 16%

RD, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 8,784
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Customer reply replied 8 years ago
It is good answer
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