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I have a question concerning a Finance exam, it's a tough one. Much appreciated!

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ba7520 | 20:44 Tue 14th Aug 2007 | Business & Finance
2 Answers
A successful wine producer pays an annual cash dividend that is made available to the firm's shareholders on May 15. The company's shares go ex-dividend on the last trading day of April. Company management is following a policy of dividend stabilization. Financial market participants expect the firm's dividends to stabilize at a level of A$ 15 per year. The firm's cost of capital is 10%.

Question a
Compute the firm's equity duration on May 1 of each year.

Question b
Present the duration as a function of time for the years 2004, 2005 and 2006 if we also know that actual, realizations have been according to expectations and the cost of capital remained 10% per annum for the whole period.

Question c
What assumptions are made when applying the Macaulay duration to equity?

Suppose that the firm decides not only to pay a cash dividend to shareholders, but a stock dividend as well.
Question D: Will this lead to a change in equity duration?
Thanks in advance!

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Hi- just a long shot, but you may benefit from looking at your course notes/text books.
If you've lost your notes this link may remind you what the Macauley duration calculation is.
http://www.investopedia.com/university/advance dbond/advancedbond5.asp

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