What was your required rate of return on medical money-flows

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Gordon Growth model for stocks and TVM You own stock in Medical Money-Flows Inc. (MMF). The company has had a very strong history of dividends, and just paid its annual dividend last Thursday, of $3.25 per share this year. Analyst reports online suggest next year’s dividend will be $3.38 per share. In fact, its price closed at a new high Friday at $84.50 per share. After Friday’s market-close, however, it was announced that the board had met with its President and, due to the recent implementation of Obamacare, it will only be able to pay $3.00 per share next year and anticipates similar (equal) drops for three more years, but expects to be able to stabilize the dividend payout thereafter. Working some quick finance/math, you want to estimate where the price of the stock might open in trading Monday morning. Given the increased risk of the firm, while T-bills are paying 3% you have raised your beta estimate for the firm to 1.2, and believe there’s a 7.5% equity risk premium. (a) To the nearest dollar, at what price per share would you expect the stock to open in trading Monday morning? (b) Given the closing price Friday, and the dividend you WERE expecting for next year, what Was your required rate of return on MMF before the news came out?

Reference no: EM132028617

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