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Sugar Luv Corporation is expected pay a dividend of $1.40 per share at the end of this year and a
$1.50 per share at the end of the second year. You expect Sugar Luv’s stock price to be $25.00 at
the end of two years. Sugar Luv’s equity cost of capital is 10% (similar to a bond’s YTM over the
2 years).
a)Draw the timeline of Cashflows, and estimate a market price valuation for Sugar luv today, January
1st.
b)calculate Sugar Luv’s dividend yield for the first year
c)Given that the cost of equity capital 10%, what is your best estimate for the price of the stock at
the end of one year?
d)What is the capital gain if you held the stock for just one year and sold it Dec 31st?
e)If you add capital gain and dividend yield together, what do you get? What is this?
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