Maintained historic annual growth rate

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BHP Group Ltd (BHP) has recently paid an annual dividend of $1.25 per share and has maintained a historic annual growth rate of 7%. You are considering purchasing the stock today because you believe that the growth rate of the dividends will increase to 8% for the next three years and the stock price will be $40 per share at the end of that period.

1. What is the maximum amount you should pay for BHP stock if you expect a 12% return and the current dividend rate is $1.25 per share with a 7% annual growth rate?

2. Given the assumption that the 8% growth rate will be sustained in the future and you require a 12% return, what should be the maximum price you should pay for BHP stock?

3. If the 8% growth rate is achieved, what will be the stock price at the end of year 3, assuming the conditions in part B and the selling price is $40 per share at the end of that time?

Reference no: EM133402394

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