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Wally is thinking about using cash on hand to make some investments. One of these investments is into Talcville Farms (TF). TF's stock is trading at $45. Wally wants you to determine if that is a fair price for the stock. Wally notes that TF just paid a dividend of $3.20 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Wally indicates that the company - like most all TF Investors - would require a 15 percent return on the stock for the first three years, a 13 percent return for the next three years, and an 11 percent return thereafter.
Problem (a) What is the current share price implied by the information above?
Problem (b) Should Wally buy the stock given its current trading price of $45?
Problem (c) If the required rate of return were ½ the rates outlined above - and assuming no other changes to the situation outlined above - should Wally still purchase the stock. If the growth rate in dividends was higher than the 5% indicated above - and assuming no other changes to the situation outlined above - should Wally purchase the stock?
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