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  • May 6, 2012, 09:55 PM
    2serious
    Caculate stock prices
    Mercier Corporation’s stock is selling for $95. It has just paid
    a dividend of $5 a share. The expected growth rate in dividends is
    8 percent.
    a. What is the required rate of return on this stock?
    b. Using your answer to (a), suppose Mercier announces developments
    that should lead to dividend increases of 10 percent
    annually. What will be the new value of Mercier’s stock?
    c. Again using your answer to (a), suppose developments occur
    that leave investors expecting that dividends will not change
    from their current levels in the foreseeable future. Now what
    will be the value of Mercier stock?
    d. From your answers to (b) and (c), how important are investors’
    expectations of future dividend growth to the current stock
    price?

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