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What Would Be the Maximum an Investor Should Pay for the Ordinary

question 9

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What would be the maximum an investor should pay for the ordinary equity of a firm that has no growth opportunities but pays a dividend of €1.36 per year? The next dividend will be paid in Exactly 1 year.The required rate of return is 12.5%.


Definitions:

Product Differentiation

A marketing strategy that businesses use to distinguish their products from those of competitors by emphasizing unique features, quality, or design.

Purely Competitive

A market structure characterized by a large number of firms producing homogenous products and where no single firm has significant control over the market price.

Inelastic Demand

A situation where the demand for a good or service is not significantly changed by the changes in its price.

Maximize Profits

The objective of increasing a company's earnings to the highest possible level.

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