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You prefer to use the Gordon Growth (constant growth) Model to price the stock of the Hines Company. You estimate that they will pay a dividend of $3.00 next year and will continue to grow at 7% for the foreseeable future.
a. What is the maximum you should pay for a share of this company if you demand a 14% rate of return? What will be the price of the share a year later if the growth rate continues as estimated?
b. Assume a year later, you observe the price of the share to be $35.67 instead of that estimated in 4(a), what rate of return is the market requiring? All other information remains the same as in (a).
c. Upon further analysis, you determine that your earlier estimates are wrong. Your new estimates indicate that after the payment of $3.00 next year, the dividends will grow at a much faster rate of 15% for the next three years. Thereafter, it will grow at a constant rate of 7%. What will be the price of the share today? Use any other information required from 4(a).
d. How does a cumulative voting system allow minority representation in corporations?
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