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Use the Dividend Growth Model to Determine the Required Rate

question 13

Multiple Choice

Use the dividend growth model to determine the required rate of return for equity.Your firm intends to issue new common stock.Your investment bankers have determined that the stock should be offered at a price of $20.00 per share and that you should anticipate paying a dividend of $0.75 in one year.If you anticipate a constant growth in dividends of 3.00% per year and the investment banking firm will take 8.00% per share as flotation costs,what is the required rate of return for this issue of new common stock?

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Definitions:

Elasticity Value

A measure in economics indicating how the quantity demanded or supplied of a good responds to changes in price or income.

Inelastic Demand

A situation in which the quantity demanded of a good or service changes by a relatively small amount in response to a change in its price.

Price Elasticity

An indicator of the extent to which the demand for a product is affected by variations in its cost.

Midpoint Formula

A method for calculating the price elasticity of demand or supply by averaging the starting and ending prices and quantities to estimate the percentage change.