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A company just paid an annual dividend of €1.25 per share. If the required annual rate of return is 14% and dividends are expected to grow indefinitely at a constant rate of 8%, the company’s intrinsic value per share is closest to:A.€16.88.B.€20.83.C.€22.50.

Question

A company just paid an annual dividend of €1.25 per share. If the required annual rate of return is 14% and dividends are expected to grow indefinitely at a constant rate of 8%, the company’s intrinsic value per share is closest to:A.€16.88.B.€20.83.C.€22.50.

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Solution

To calculate the intrinsic value of a share, we can use the Gordon Growth Model (also known as the Dividend Discount Model). The formula is:

P = D / (r - g)

where: P = price of the stock D = dividend just paid r = required rate of return g = growth rate of dividends

In this case: D = €1.25 r = 14% or 0.14 g = 8% or 0.08

Substituting these values into the formula, we get:

P = 1.25 / (0.14 - 0.08) = €20.83

So, the intrinsic value per share is closest to €20.83 (Option B).

This problem has been solved

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